Multiple 401(k) Rules

I first wrote about this subject over two years ago in a post entitled Beating the $51K Limit (for which I am still eternally grateful to Mike Piper for the pearl that grew into that post.) Well, the $51K limit has since grown into the $55K limit thanks to inflation, but all the same principles still apply. I get tons of questions on this subject in online forums, in the comments sections of the posts on this site and by email. I’m mostly writing this post so I can copy and paste its URL instead of typing the same old stuff over and over again. (Come to think of it, that was the motivation for starting this site in the first place.)

Here’s the deal. Many physicians work for multiple employers, or work as an employee and either an independent contractor or a consultant. Many others have a side job of another type. Their incomes are far higher than they require for their current spending needs, but they’re behind on their savings or otherwise have a desire to maximize the amount of money they can put into retirement accounts, especially tax-deferred retirement accounts. Obviously, these types of accounts minimize tax, maximize returns, increase asset protection, and facilitate estate planning. Who wouldn’t want to get more money into them? However, most of these doctors are surprised to learn that you can have more than one 401(k). That’s right,

YOU CAN HAVE MORE THAN ONE 401(K)!

Okay, now that I’ve got that out of my system, let’s make a list of the 7 governing rules for using more than one 401(k):

Rule # 1 One Employee Contribution Total

The IRS only allows you to make a total of $18,500 ($24,500 if 50 or over) worth of “employee contributions” to all of your 401(k)s (or 403(b)s) no matter how many unrelated employers you have. If you have access to two 401(k)s, you can split this up, but the total must be $18.5K ($24.5K if over 50) or less.

Rule # 2 $55K Per Unrelated Employer

The IRS also only allows you and your employer (which might also be you) to put a total of $55,000 per year into a 401(k). This includes the employee contribution, any match from the employer, and any employer contributions. This is the same limit for a SEP-IRA (which is technically all employer contributions.) However, unlike rule # 1, this limit applies to each unrelated employer separately.

Unrelated employers means that the businesses doing the employing are not a “controlled group.” There are two types of controlled groups. The first is a “parent-subsidiary” group. This is when a parent business (corporation, sole proprietor, LLC, partnership etc) owns 80%+ of another business. The second type is a “brother-sister” group. This is where 5 or fewer individuals, estates, or trusts own a controlling interest (again, 80%+) of two different businesses.

So if the two businesses you are involved in aren’t a controlled group, and they each have a 401(k), (or a 401(k) and a SEP-IRA) you get two $55K limits. Pretty cool huh? There are several common examples where this could apply to a physician:

Example One

A 40-year-old single physician is an employee of two completely unrelated hospitals. The first pays him $200K per year and matches 100% his first $5K put into the 401(k). It also offers him a 457. The second pays him $100K per year and matches 50% of the first $7K he puts into his 401(k). What retirement accounts should this physician use in order to maximize his contributions?

Hospital 1 401(k): At least $5K (plus the $5K match)= $10K

Hospital 1 457: $18K

Hospital 2 401(k): At least $7K (plus the $3,500 match) = $10,500

Plus another $6K into either hospital’s 401(k) (pick the one with the better investments)

Example Two

A 40-year-old married physician whose spouse doesn’t work is a partner in a 100 doctor partnership which offers a 401(k)/Profit-sharing plan in which he can “self-match” up to the $55K limit. The partnership also offers a defined benefit/cash balance plan with a $30K limit. He makes $300K practicing medicine. He is also the sole owner of a website on the side that makes $300K per year and has its own individual 401(k). Both 401(k)s offer a Roth option. What is the maximum amount he can put into Roth accounts in any given year without doing a conversion of tax-deferred dollars?

Partnership 401(k)/PSP: $55K, of which $18.5K can be Roth

Partnership DB/CBP: $30K, of which $0K can be Roth

Website Individual 401(k): $55K, of which $18.5K could be Roth if none of the Partnership 401(k) money represents an “employee contribution.” Otherwise, $0K Roth.

Example Three

This 52-year-old married physician (spouse doesn’t work) is an employee of a hospital where she is paid $200K. She has a 401(k) with a set $20K employer contribution (not a match) and the hospital pays most of the premiums on a non-high-deductible health plan. She moonlights across town as an independent contractor and is paid on a 1099, where she earns $100K and has opened up an individual 401(k). The hospital 401(k) has terrible investments and high fees. How should she allocate her retirement savings in order to best use these options?

Example Four

A 40-year-old single physician is in a business partnership with one other physician and they have several employees. Due to hassles and the costs of their employees, they have opted to use a SIMPLE 401(k) for their practice. He makes $200K. He also does some consulting work on his own as a sole proprietorship where he is paid on a 1099, about $50K per year. He and his physician business partner recently opened up another business where they sell a medical device. They are the only owners of both the practice and of the corporation that sells the device (which has no employees.) He makes another $50K from this company of which $25K is salary and $25K is a “distribution” from the S Corp. What kind of retirement set-up should this physician do?

When calculating the employer contribution for a SEP-IRA or an Individual 401(k), you use your “net earnings from self-employment” This includes any amount used for an employee contribution, but excludes the amount used for S Corp distributions (those aren’t “earned income” and so can’t be used for retirement account contributions) and used for the employer half of the payroll taxes (same as the self-employment tax deduction.) The employer contribution in an individual 401(k) and a SEP-IRA is exactly the same, but since you can also make an employee contribution into an individual 401(k) (and 401(k) money isn’t included in the backdoor Roth pro-rata calculation,) a 401(k) is generally the better option for the self-employed, even if it is slightly more complicated to open (and must be opened in the calendar year rather than before tax day of the next year.)

Rule # 4 You Only Get One SEP, SIMPLE, or 401(k) Per Unrelated Employer Per Year

Each unrelated employer should only have one of these three types of accounts for each tax year. However, you could open a SEP-IRA for your self-employment income in March 2015 for tax year 2014, and then open an individual 401(k) in June 2015 for tax year 2015 if you like. Remember that just because you are the sole owner of two separate businesses doesn’t mean you get two different retirement accounts. Those businesses are a controlled group.

Rule # 5 These Rules Have Nothing to do With 457s, IRAs, HSAs, or DBPs

457(b)s, Backdoor Roth IRAs, HSAs, and defined benefit/cash balance plans all have their own separate limits that have nothing to do with the limits for 401(k)s, 403(b)s, SEP-IRAs, and SIMPLE IRAs. Putting more into a Roth IRA doesn’t mean you can’t still max out your 401(k).

Rule # 6 Catch-up Contributions Also Allow You to Beat the $55K Limit

Many accounts have catch up contributions if you’re old enough (usually 50 or older, but 55 or older for HSAs.) Roth IRAs have a $1000 catch-up, HSAs, have a $1,000 catch-up, and 401(k)/403(b)s have a $6,000 catch up. That $6,000 catch-up is in addition to the $55K limit, so if you’re over 50, you’re self-employed with lots of income, and you make your full $24,000 employee contribution to your individual 401(k), the $55K limit becomes a $61K limit.

[Update 2/25/15: If you follow the discussion in the comments section below, you’ll see there is one more rule that readers need to be aware of, which I have turned into Rule # 7.]

Rule # 7 403(b)s Are Not 401(k)s

Many physicians have access to a 403(b) by working for a hospital or public entity. There is a unique rule for 403(b)s, however, which will prevent many doctors who use a 403(b) at their main job from maxing out an individual 401(k) on the side, at least if they own 50% or more of the company for which they have an individual 401(k) (and they probably do.) It doesn’t make much sense, but neither do many tax and retirement plan rules out there. Basically, your 403(b) at work, unlike a 401(k), is considered to be controlled by you. So you are stuck with the same 415c limit of $55K (see Chapter 3.) So if you put $18.5K into your 403(b) at work, you are only allowed to put $55K-$18.5K=$36.5K into an individual 401(k).

My Accountant Doesn’t Believe You

Obviously, having access to multiple 401(k)s is an unusual situation among Americans in general, even if it is quite common among doctors. As such, an unbelievable number of accountants (and especially their clients) have a misunderstanding of the rules noted above, particularly the one about having a separate $53K limit for each unrelated employer. However, taking a look at this article on IRS.Gov written in layman’s language, you can see this is true:

Overall limit on contributions

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

elective deferrals

employer matching contributions

employer nonelective contributions

allocations of forfeitures

The annual additions paid to a participant’s account cannot exceed the lesser of

100% of the participant’s compensation, or

$52,000 ($57,500 including catch-up contributions) for 2014 ($53,000, or $59,000 including catch-up contributions for 2015).

There are separate, smaller limits for SIMPLE 401(k) plans.

If that’s not enough for your accountant, you can simply go straight to the actual code sections in question, in this case, 415(c) (where the $55K limit comes from, originally $40K.) Be sure to scroll through subsections (f) through (h) where the relevant examples are used:

(f) Combining of plans

(1) In general

For purposes of applying the limitations of subsections (b) and (c)—

(A)all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and

(B)all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan.

Note how it says all defined contribution plans OF AN EMPLOYER are to be treated as one plan. Section (g) reads similarly:

(g) Aggregation of plans

… the Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, ….with respect to which the participant has the control required under section 414 (b) or (c)…shall…disqualify one or more…plans…until such benefits or contributions do not exceed the limitations contained in this section.

Again note the key words- BY THE SAME EMPLOYER. So, different employer, totally separate $55K limit.

What do you think? Are you using multiple retirement plans at unrelated employers? What is your set-up? Comment below!

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Between these three employers, I max out a 403b, a 457, and the employer contribution of my individual 401k. I also accrue time concurrently in two pension systems with a reciprocal agreement. And hopefully I also make enough, for long enough, in Social Security-eligible employment (e.g., my self-employment) to beat the windfall elimination provision too.

@NP – attend at employer 1, non-medical faculty position at employer 2, and consult on a self-employed basis.

@WCI – thanks for pointing out the detail about 403b’s and individual 401k’s (again). Had missed it, though in my case my self-employed income is not so significant that I would come close to that limit (yet).

I may take up a second job to increase the amount of tax sheltered savings–leading to these potential options.

1. Working as an employee at my sister’s private practice in order to contribute $15,000 in a 401k she had set up for her employees.
2. Getting a 1099 at my sister’s private practice or with any other locums agency to contribute $10,000 in a SEP IRA or Solo 401k. If I choose SEP IRA, I would convert it to Roth every year. I estimate making only $50,000 at a second job, which limits the amount I can contribute. This might make working as an employee at my sister’s office a better option for maximizing the amount of money in a tax shelter.

You can’t make employee contributions to the 403(b) and a separate 401(k).

You could do a solo 401(k) if you are an IC to your sister. You would be limited to ~20% of your income there up $53K-$18K (see the 403(b) rule in the article.) So if you made $50K from her, you could put ~$10K into a solo 401(k). You could put the same into a SEP-IRA, but unless you converted it or rolled it into another 401(k) each year, that would screw up your backdoor Roth IRA.

I’d definitely go the 1099/IC route if your goal is more money in a retirement account.

Your website has likely saved me tens of thousands of dollars over my career. The Mega backdoor Roth and multiple 401k’s are two of the areas I had never heard of before reading your site.

My current setup

Employed urologist

Hospital job-

403b with 100% match up to 6% of salary on IRS limit of $265000- so $15900 per year

non governmental 457b. The hospital also has a non-qualified plan that matches up to $7500 of contributions into this account and places these funds into 401a account. They will be lost if I leave so tax deferred for now. At three years these funds vest, so they become taxable and are distributed to me.

After tax contributions into 403b- limited by the HCE testing to 5% or 13250 per year. then converted in-service to Roth IRA annually via the Mega Backdoor (plan does place restriction on further contributions for six months after distribution).

I also treat stones with shockwave lithotripsy as a side job, paid on 1099. I have a Vanguard Solo 401k that I use to stash the remaining $2100 of employee contributions then my 20% of net profits.

This year I began buying into the lithotripter, so I have K1 income as well for the employer contributions to the solo 401k.

And of course, Back door roth accounts for my wife and for me.

My wife is a nurse at a separate hospital where she has access to their 403b. She only works 1 or 2 days a month but all of her salary goes into her 403b. Something like $12000 per year.

All told, we are able to put something like $95000 per year into various retirement accounts. I am two years out of training so still trying to pay off student loans prior to doing any taxable accounts.

In practice, as an employed physician I get my med mal coverage through my employer. Rather than purchase a separate policy to cover lithotripsy only, my employer will cover those services, but I have to sign over the checks. The checks are subsequently paid back out at full face value as W2 income with taxes withheld. At the end of the year, my accountant simply creates a record of these signed over checks as a deduction for my sole proprietorship.

This has the effect of converting about 85% of my 1099 income to W2 income (the remaining 1099 income is not for direct patient care and is not subject to the signing over). This obviously has a negative effect on my ability to save in a solo 401k, but I have run the numbers both ways (purchasing a separate malpractice policy versus turning over the checks), and the amount lost in retirement savings is more than made up for in the amount saved in malpractice premiums. It is not ideal, and I complain about the situation more than my colleagues, but I am happy with the arrangement overall. This is why the K1 income is important to me, as it is not subject to these restrictions.

True that re: accountant not believing you. I had to have the owner of the company administrating my solo 401K call the accountant to explain the law.

Part time day job – private practice – 208k – just enough to reach my 52k max by employer contribution using a semi-outdated type of plan – the money purchase pension plan. We have switched to a profit sharing 401k for 2015.

Side practice – 50k of 1099 income, solo 401k – $27,293 contribution.

Added benefit of my solo 401k is that it accepts rollover deductable contributions, which enabled me to back door roth the non-deductable $ left over in my IRA

Back door Roth -5.5k

Total $85,793.

I had thought about looking for a more full time gig with one group, rather than trying to manage two different schedules, however, it works out better from a retirement savings standpoint to have the two different jobs. Since my main practice is switching to a 401k profit sharing plan, I will have to be mindful of the individual 401k limit, which shouldn’t be an issue as long as I maintain an income of >212k.

$208K seems a little low to max out a $52K retirement account solely based on employer contributions. Be careful you’re not making a maximum employee contribution to both 401(k)s. Remember you only get one of those.

Regarding 208K not being enough to max out at 52K contribution – the rules of our money purchase pension plan are that the company must contribute 25% of our income from the company profits, so the 208K is just enough – in fact I had to defer some expenses to be paid out of 2015 funds in order to meet that number to max that account. Moving forward, since both plans will be 401(k) type, I understand that I have an individual 401(k) component limit. If I can show income of greater than 212 K in my main practice, the company profit sharing contribution will max that account and I will not have to use the 401K component of the profit sharing plan, and can use all the 401(k) contibution in my side job. I may have to play with expenses next year in order to maximize contributions from both accounts. I know it is a somewhat unique situation because in my main job we have only four equal partners, which allows us to use the profit-sharing component differently than other types of groups that may have employees or lower income workers.

What awesome timing for me for this post, and I have a question of what my maximum contribution options are. Here is my situation:

I am single and about to be employed by a Megacorp that will pay me a stipend as employee (W2) of $178K per year including some health benefits with HSA capability as well as a 401K.

I will also be an independent contractor doing work for the same company. They will be paying my LLC (1099) which in turn will pay me $350K (W2).

Does this mean that I can have the Megacorp put in 25% into a 401K ($178K * 25% = $44,500)
and also I will be able to maximize my $401K through the LLC of $53K
plus an HSA $3400
plus a back door roth $5500

The math looks fine, but keep in mind you can only put as much into the employer’s 401(k) as the employer will let you. They may not let you put $44.5K in there even if the law allows it. There is also the HCE issue with the megacorp which may limit you. Go talk to HR about it.

WCI is right – depending on the plan design, they may limit the contributions made by HCEs to something like 10% or 12%. That’s a big bummer for most HCEs. Maybe with a match and/or profit sharing (if they have any) the contribution can be larger, but your salary deferral % limit is usually spelled out when you go to the portal to make your salary deduction election.

Awesome article! Hopefully someone could help clarify my situation. I work full time and made $300k last year where I maxed out the 52k contribution. I also own rental property in an LLC in which I collected about $30k in rents. Could I contribute the $30k from the rents to a solo 401k held by my LLC?

I believe you can do this by starting a property management company and charging out a management fee to the rental properties. Then you just use the earnings to contribute to the Solo 401(k).

Now whether it is worth the time and or hassle to save taxes of around 5k (just the first 18k of earnings) I don’t think so. Unless of course you are a CPA or are really good at finances and can do it all yourself and find it interesting.

I believe it is possible but probably not worth the complexity. You would just create a management company and charge out a property management fee. With the earnings, you would contribute to the solo 401k or SEP but most likely the 401K since you can get to the 18,500 relatively easy.

The downside is that you might create PAL’s but if you did it right you wouldn’t. Also, if you have a stay at home wife (such as myself) who qualifies as an active real estate professional, you can actually create losses on the rental side to offset ordinary income while deferring income in the retirement account.

I would probably never recommend this to anyone unless they really enjoyed the structure and could do it all themselves.

Haha Dave, that’s a good try, but (WCI correct me if I’m wrong) 401k contribution only apply to “earned income,” and the IRS does not consider investment income, capital gains, dividends and interest as “earned income.”

Most of us are not day traders but almost all of us receive passive income/dividends on our 1099 from our brokerage account, which unfortunately cannot be put into a solo 401k.

You have to convince the IRS your day trading income is earned income. As a general rule, investment income (probably including any LTCGs and dividends from a full-time job as a day trader) is not earned income. However, if your trading is substantial with continuity and regularity and you are using the income from it for your livelihood and spending a great deal of time doing it, then I think you can make a case that you are in business as a securities trader. I think part-time while working as a doc is going to be a stretch, but if you think you can win in an audit….

Unless day trading is your job. In your case, it isn’t. But in the case of some people, it could be. You just have to be able to convince the IRS it is your job. However, that will be tough since most day traders don’t make money.

I think it is the controlling groups that is stumping me. Say I own 100% of a pllc that has 1099 physicians + myself working there and am a sole proprietor 1099 at an addiction center. This qualify me for 2 401k’s? If not, what can I change to make it happen?

You are the sole owner of both businesses- one 401(k). I think that one is pretty clear. Maybe if you gave most of your pllc away to the other docs you could qualify for another 401(k). Probably not worth it.

Why would you say that he can’t have 2 401k plans? If he had the same business and tried to shield some income as his personal 1099 income, then there would have been a problem if he tried to have 2 different plans. These are two distinct businesses, and even though he has control of both of them, I believe he can have a 401k plan for each. Controlled group would be if he had employees in both groups, then he’d have to cover both sets of employees with a single plan. But in this case, I believe that he can have a Solo 401k for his 1099 work and a separate 401k for his PLLC. I’d be happy to check with my TPA on this, but I’m almost certain having 2 401k plans is possible if you own two distinct businesses, with one of them being a solo proprietorship with 1099 income.

I do not believe so. They will share the $18k limit, that’s for sure. If what you are saying is true then he would be limited to just a single plan, but we’ve established that that’s not true. In any case, this stuff can get pretty complex to it is highly recommended that anyone in this situation talk with someone who can help them figure it out because any advice offered here is approximate at best (since we don’t know the entire situation).

Then what’s to keep an independent contractor physician from just forming 4 different LLCs, working for each one for a quarter each year, and then using four individual 401(k)s each with a $53K limit. The IRS isn’t going to let that slide IMHO.

Yes, exactly. THAT is not going to work. IRS will pay you a visit for sure. These have to be legitimate entities/businesses. Even then IRS might wonder. Not everybody at IRS is an expert at this, I bet. That’s why each entity has to be in order. This is a job for an entire team consisting of a CPA, business attorney, TPA and adviser. Ultimately it will be the CPA filing taxes, so I’d get them involved before doing this (even if they disagree, at least this can start a conversation). In one case the TPA and myself were talking with the practice attorney, and disagreeing, so we felt that we needed to bring in an ERISA attorney on the matter. It can get this complex when the business attorneys start messing with entities to try to find loopholes. So my suggestion is to get your team together and discuss this before doing it, despite the WCI stamp of approval 😉

My TPA says this can be done, but each case has to be examined on its merits, so we can not generalize this to everyone. If you have different sources of income, you can open a retirement plan for each one of them. If you are getting 1099 income from multiple sources you can potentially open a plan for each source. At some point if you have the same job but different 1099s you’ll have to aggregate this income for the purpose of having a plan.

So someone with two 1099s from two contract agencies might have to aggregate this (again, talking with a CPA or with IRS might help). But someone who has two different contract jobs doing different tasks might be able to have 2 plans. If a doc does two 1099 surgery jobs, these might be aggregated as well.

If your 2nd unrelated (or not identical) business does not have employees, then maybe. Sometimes it is obvious that the answer is yes, and sometimes I’d have to consult a CPA or an attorney to get an answer. I don’t have anything from the IRS. I can provide a referral to an ERISA attorney who can give you a written opinion that will stand in court. Getting answers out of IRS might not be that easy (and their opinion letters might cost a lot more).

Here’s my take on finding a general rule that says when one can open solo 401k plan(s) for various entities one controls. Because there are infinite number of combinations, there isn’t a set of rules that address every possible one. There are no ‘rules’ that anyone can point to that say when you can open another retirement plan (or a number of such plans). However, there are rules that tell us what we can NOT do, and these are the affiliated/controlled group rules. So we’d have to consider each example on its merits based on the affiliated/controlled group rules. Before opening a solo 401k plan or a number of such plans for various entities, we have to apply these rules first. If we pass, then nothing really stops us (aside from aggregation of limits). Unfortunately, we have to rely on ERISA attorneys and those who understand these rules very well to provide guidance in cases that are not obvious because these rules can get extremely complex.

My take is this. Controlled group only matters if you have businesses with employees. If you have two separate businesses, without employees, you can have two different plans. The whole idea behind controlled/affiliated group stuff is to make sure that all of the eligible employees are covered. Without employees, you can have two plans for two sources of income. The whole point is to prevent you from opening a plan that shortchanges your employees from another business.

“In other words, the rules are in place to restrict the owner(s) of a business with full-time employees from establishing a new company with no employees and adopting a Solo 401(k) plan that would exclude the full-time employees from the other company”

Well, the question is moot to me since I barely make enough with WCI to max out one 401(k), much less two. But it seems a pretty gray area to me. Certainly I think you’ve got an argument that could be used in an audit or tax court case. I have no idea if you’d win the audit/case though.

I agree, that’s why if I’m even 1% doubtful about a particular arrangement, I’d rather pay an ERISA attorney for an opinion letter than to have to pay for an IRS audit. By the way, just as a word of caution. My TPA is also an ERPA, so she gets to see what causes IRS to audit various plans, and she told me about a doctor who had a solo 401k on the side with his wife in addition to the practice 401k plan. Everything was legal, except that the wife took out a big loan out of the solo 401k and that triggered the IRS audit. You never now what will trigger the IRS audit, so it is better to be safe than sorry.

ERISA Stone |
March 25, 2015 at 8:03 am MST

If you are part of a controlled group (i.e., if someone owns 100% of two businesses), you only get one 415 limit ($53k).

Whitecoat, I enjoy your blog. I would encourage you to tidy the controlled group rules a little. There is a little more that goes along the 80% brother-sister relationship to determine if it’s actually controlled. I’ve had plenty of clients who meet the 80% rule, but due to the additional 50% effective ownership rule, do not meet controlled group requirements. You can find it here http://www.irs.gov/pub/irs-tege/epchd704.pdf.

I will go ahead and correct myself. Sometimes knowing 1/2 of the right answer is the same as being 100% wrong, so here’s the scoop on whether a doc can open a solo 401k for the 2nd entity that they control.

If you have a controlled group or a controlling interest with two entities, for the purpose of having a retirement plan, both of the entities are treated as one. Controlled group is triggered by owning 80% or more of both entities. A controlled group does not allow having TWO separate 415 limits, so only one 415 limit applies ($53k).

So for example, if the doctor owns practice #1 AND they have practice #2 (whether a sole proprietorship or not, with or without employees). In his case, the doctor has a controlling interest (80% or more of both entities), so BOTH entities have to be considered as one. And as a result, only a single 415 limit is available.

Does this mean that you can’t have a separate plan for the practice #2? NO, it does not. Here’s why. You can exclude one of the two practices from coverage, if you can pass the minimum coverage test (ratio of NHCEs to HCEs) and at least 70% of NHCEs should be covered. This test is clearly fails for the practice #2 that is a solo proprietorship. But then you can also see if some of the practice #1 employees can be legally excluded if you can pass the minimum coverage test. So for a sole proprietorship the answer is NO – if you are a controlled group, you can not have a separate solo 401k plan.

There are endless variations on the theme, and each one would require a fresh look. Just because you have a controlled group does not mean that you can’t have separate retirement plans, as long as they are tested together and can pass all the tests, it may be possible to have separate plans. I’m no expert in testing, and this is where I’d get a TPA involved.

Another thing to watch out is affiliated service group, which applies specifically to medical/dental practices. You might not have a controlled group, but if you have an ASG, the same rules apply – one 415 limit and one group for plan testing purposes. Even with ASGs, you can potentially have separate retirement plans for the principals and for the employees, as long as you can pass testing. Then you also have to watch out for attribution rules (especially husband/wife and children). So, bottom line, don’t try to guess – talk with an ERISA attorney and get it all in writing because it would take an endless number of examples to illustrate all possible cases, and sometimes the same example can yield a different answer if the facts of the case are just a little different.

You lost me in there. Explain a couple of things again. First, how is an affiliated service group different from a controlled group and second can you provide a concrete example where a doc owns 80%+ of two businesses but can still get two 415 limits.

Quoting from above: “An affiliated service group is one type of group of related employers and refers to two or more organizations that have a service relationship and, in some cases, an ownership relationship, described in IRC section 414(m).”

This was apparently enacted to cover any loopholes in the controlled group rules. So you can have two entities that are NOT a controlled group, but they can be an affiliated group if one performs service for another. So any arrangement where a spouse has a separate entity and provides services to the other spouse’s practice might be an ASG. This would disallow having a solo 401k plan for the entity.

So for example, suppose that a doctor owned 50% of a practice and also had a 100% sole proprietorship. This is not a controlled group. But if the same doctor performed work for the practice (and his sole proprietorship income originated from doing this work), this is an affiliated service group. The ASG rules are even more complex, and I don’t claim to be an expert, but many medical/dental practices are often broken down into ‘solo’ entities, which might avoid some controlled group rules, but they are always caught by the affiliated service group rules.

If the doc owns 80% of two or more businesses, this creates a controlled group, so the doc can only have a single 415 limit. However, they might be able to have two separate PLANS, say one for entity 1 and one for entity 2 (or none for entity 2), but with a single 415 limit. The idea is that you might be able to exclude one of the entities (if you pass the coverage test), or to have separate plans, but with a single 415 limit. This is one big point of confusion that I’ve had before. They really nailed the small practices with that one.

This is where Defined Benefit/Cash Balance plans come in – you might be able to get a bigger bang for the buck with these vs. 401k.

Konstantin Litovsky: Would you be able to provide the contact info for the ERISA attorney you used? I am interested in getting their guidance & written opinion for our own situation. We have an operating company (S-corp with employees) and another LLC (no employees) which own the office building that the S-corp is occupied.

There is enough income in both businesses to max out both 401K plans. Our TPA said yes, we can open a 401K plan for each business. Just wanted to get a second opinion from a tax attorney before proceeding. Thanks!

I’ll save you some time and money. Based on the facts you provided, you can’t use the LLC income to fund a retirement plan because it is passive income. So that makes this really easy. Your TPA is 100% wrong, you might want to consider a different TPA because if that’s the level of advice they are providing, I would worry that other things might also not be up to par.

Thanks for the reply Kon Litovsky. Sorry, I was not very detailed with my post above regarding the LLC. I understand passive income can’t be used to fund retirement account. But if I get paid via W2/wage from that LLC, wouldn’t that income be eligible? (only if we get passed the issue with having multiple 401K accounts from multiple companies (in controlled group situation). The income tax savings here may be much higher than employment/payroll taxes.

Few other issues that are also in the gray area are: A) If your businesses are considered “controlled group”, does the rule prevent you from open multiple 401K accounts? B) Or does the rule still allow more than one 401K accounts from multiple “controlled group” business BUT cap it at the maximum of $55K (for 2018)

In the event that the rule does allow multiple 401K accounts for multiple “controlled businesses” but cap at $55K, I can see it still very beneficial in certain situations. For example, your Company A with employees, you can only put in $35K max due to certain calculation/testing method. Your Company B (as LLC without employees) can pay you W2/wages, and you can use to put toward that $55K limit in the second 401K plan.

Does that sound like a correct interpretation of the rule? Thanks again for your insight!!!

I don’t believe you can get a W2 from passive in come LLC. You might want to talk about your CPA about that – this would be too easy to circumvent the passive income limitation. Passive income is passive income. You can qualify as a real estate investor, and this might allow you to get a W2 from your LLC, but this is tricky and requires substantial proof as the IRS is surely going to audit you (such as ~700 hour work requirement, and many others).

You can have multiple 401k accounts with a controlled group, financially it makes no sense because of cost and complexity.

With a controlled group you get a single $55k limit for all plans, and that’s that. It is as if you have a single plan with multiple accounts, that’s the effective result of having a controlled group. Thus, it is never a good idea to have multiple plans with controlled groups. There are also fiduciary issues, since you can’t have substantially different plans with different options/expenses, etc. So a single plan will always be better.

There are different instances of controlled group rules with leased staff where the staff are employed by another entity that pays them a W2. In that case this can benefit the owners because their employer contribution will be lower by the amount contributed by the entity that employs the staff.

SmallBusinessOwner, if you are still looking for an ERISA attorney to talk to about the controlled group rules, I would reach out to Derrin Watson. You can find him here: http://ferenczylaw.com/s-derrin-watson/

He’s fantastic! I scheduled a call with him and my client and he had their situation straightened out within an hour.

There are two major concerns: controlled group (when you own more than one entity with employees, where ALL employees have to be covered because the entities are part of a controlled group), and affiliated group (when there are multiple entities that are affiliated and employees might end up in a separate entity, so all such entities have to be included when it comes to offering a retirement plan to eligible employees).

It is not always easy to spot the problem, so if you believe you have such an issue, you will need to speak with someone who is knowledgeable about this to get an opinion. In some cases we refer our clients to ERISA attorney to get a written opinion, because this is a serious matter that can not be taken lightly.

Suspect my situation is a brother/sister controlled group. I’m a partner in a physician owned group. There are 8 of us. We all max out a 401K at 53K (more for the older guys). Also we have a joint venture with a dialysis provider. All 8 of us do not participate, and the 7 that do all have differnet ownership interest. I purhcased my percentage with with through an LLC owned by me. We are all minority partners to the dialysis provider. I get a K1 for the income through the LLC. I hope this is less confusing to read than it was for me to write.

You might have an affiliated group. In that case you might have to offer the retirement plan you have to your dialysis provider. This is a serious matter – if you do not cover all of the employees legally entitled to get coverage under the IRS rules, you might get a hefty IRS fine (that adds up the longer this arrangement has been in place). We have been dealing a number of these types of issues, and we usually determine beforehand whether there is a controlled or affiliated group before doing a plan (not doing so can be costly to the plan sponsor). You will need to have your plan and corporate structure examined by someone who can tell you whether you have an affiliated group and they should also give you advice on how to fix your plan if that is indeed the case.

If a spouse has an LLC business (single employee) with around $10-20k in earned income, I believe the limit of Solo 401k contributions is 100% of her earned income? I was hoping to use my income to increase tax sheltered investments (up to $53k) via that route, but don’t think that will fly with the IRS. Is that correct?

Total earned income is the total income that is earned. Things like S Corp distributions, dividends, and rents aren’t earned income. Business expenses are subtracted before you get to your income. Personal deductions are not.

Roth contributions have to be from the employee contribution portion ($18.5K in 2018).

I checked with my CPA and he was not convinced. Here is my situation.I am part of a group practice where I get a K1 .We don not offer any retirement plans to our employees and so do not use this income for our retirement plans as well.I do get a 200k worth 1099 for being a medical director and use this to max out the 52k for a solo 401k. I have started working in an LTAC facility and formed an LLC for billing this service and expect to have some 100k income.I was hoping to open a 401k using this income.

As with above post, you might have an affiliated group. Did you get professional opinion on whether you can legally exclude employees from your group practice plan? In most cases this is rather easily determined, but sometimes we have to go to an ERISA attorney for a written opinion (the cost of not doing so can be huge). This sounds to me like a big problem waiting to happen. If your employees are shared by your practice, you have to offer your group plan to them. IRS will not like this one bit if it turns out you are excluding employees that should be legally covered under the law.

You can indeed open a solo 401k plan for any 1099 income not related to the main practice, and potentially you might open another 401k for your second business (billing service). I believe that if you have different entities you can have a retirement plan for each one, but the salary deferral can be only $18k for all of them.

You can indeed open a solo 401k plan for any 1099 income not related to the main practice, and potentially you might open another 401k for your second business (billing service) IF you don’t have employees for your billing service other than spouse employee (that’s key).

W-2 employee of a hospital. The same hospital hires independent contractors as well to fill in gaps, and the hospital will allow you to pick up extra shifts and pay you as an independent contractor for 1099 income for the extra shifts. Can you then contribute to both the hospital’s 401k and a solo 401k?

Sure. One employer is the hospital. The other is you. Remember only one employee contribution between the two. I’d worry more if I were the hospital honestly. Seems hard to justify paying you sometimes as an employee and other times as an IC.

Can I add a twist here: what if instead of the second income being 1099, it is guaranteed payments via a K-1? To explain further, instead of a single hospital, say it’s 2 affiliated entities, in one of which I am a small partner (so, they are a controlled group, but I am not part of it). One pays me W-2 income, and has a 401k to which I contribute. The other pays me a guaranteed pmt and gives me a K-1. Can I contribute to a solo 401k based on this K-1 income? Thx!

Sure, they have a 401k plan, I don’t see why you can not have your own plan for any 1099 income you get from them as well. Same thing if you are an employee of a hospital and also get 1099 income from the same hospital. There is no issue there as far as I understand your situation. Just make sure you coordinate your contributions.

What do you mean by coordinate the contributions? The question I have is whether he gets two $53K limits in this situation. I guess so because one business is owned by someone else, and one is owned by him.

So the two entities are affiliated – this has nothing to do with OP. This does not sound like a controlled group to me, because OP is not an owner of the other business (unless he owns more than 50% of the other business). Whether two businesses that employ him are affiliated or not is not really an issue – they can be the same business for all we care. As long as he’s an employee in one and 100% owner in the other one, I believe he can have two limits, unless I’m missing something.

K-1 is like 1099 income, so no biggie there. I’m a little worried about the fact that the two businesses are affiliated and worry that your total limit between the 401(k) and the individual 401(k) would be $53K instead of $106K. Might not even be much of an issue if the K-1 income is small and you’re not maxing out the $53K limit on the W-2 401(k). But if you’re trying to get more than $53K in, might want to look a little more into this.

Thx, WCI. I believe the actual snag is that the employer is considered the partnership (e.g., definition of Employer and Partner in Pub 560). So, there is actually no solo 401k allowed from the K-1 income at all. The partnership must set up a 401k (and do the employer contributions). In my case, the partnership’s controlled group already has a 401k, so no second $53k here.

Yes, I believe that FD is right. The partnership is the employer. If they do not set up a 401k plan, you can not have your own individual account. However, if they do have a plan, you can have a ‘brokerage only’ plan where every partner has their own individual accounts. Case closed!

I thought solo 401ks only allowed contributions based on “salary” and not the K1s of an scorp/partnership. I could definitely be wrong here as I am not a expert in this area. Maybe that restriction is just for SCorps.

‘Solo’ or ‘Individual’ is specifically for solo business owners, not employees. It is net profit from any direct earned business income. In fact, W2 is specifically excluded from solo 401k contributions because if you are not the owner of your business, but rather an employee, you are not eligible to open a solo 401k plan – you have to own your business to be able to do that. However, if you as the owner pay yourself a W2, that’s fine.

I will ask my TPA and see whether I’m missing anything here. Are you paid as a sole proprietor by the 2nd entity? Then why K1? Are you a partner of the 2nd entity as well?

The contributions for Scorp and C Corp into solo 401ks are based strictly off of W2 wages the owner pays itself. The K1 distribution for Scorp owners is not used to figure any contributions into a Solo 401k. I’m soaking strictly of single member/owner SCorps and C Corps. I guess that maybe a K1 from a partnership doesn’t fall into this category?

If you sign contracts with 2 different Locums agencies who both pay you as a 1099 contractor, do you get to establish a Solo 401k for both?

What about working for different hospitals under a single Locums agency (as is typical)? One Solo 401k for each hospital or just a single Solo 401k for the agency itself?

If your situation is such that you can establish multiple Solo 401ks, do you think it best practice to establish them at different investment houses (eg one at Vanguard, one at Fidelity, etc) or keep them under the same roof?

I believe that as a sole proprietor (not as an owner of two businesses), all of your 1099 income will be aggregated so one solo 401k. If you had two physically different business entities, then more plans are possible.

I have just started as a new attending in the past year. I’m trying to figure out how to maximize my retirement accounts.

My setup:
Partnership (technically 2% soon to be 50%) with K1 or 1099? income 300k
Separate 1099 income from hospital system for call coverage 80k

I have formed an s-corp and all income goes into the s-corp. I then take a modest salary around 120k. I know this number will have to go up but my call coverage and salary have been increasing so this is what it has been.

The partnership has a retirement plan that has an old defined benefit plan or something. My partner is near retirement and the staff has had little interest in contributing to this plan. In speaking with him it may not be possible/desirable to contribute to this plan.

It seems my best option would be to open a 401k plan with the partnership which would be offered to the employees and my partner would likely opt out. I could then have a separate individual 401k for my 1099 hospital employed income? Does the fact that all income is going into my personal s-corp change the ability to have 2 separate accounts? Are there any other options for accounts at my personal s-corp level?

Does the partnership pay you on a K-1 or a 1099? Also, you need to get the details on the partnership plan. It could be anything from a 401(k) to an insurance product.

At any rate, if your goal is to maximize your retirement accounts, you’ve chosen a salary that is way too low. You can only put in $18K + $24K = $42K due to that choice. Might want to rethink the S Corp.

If you didn’t have the S Corp, and you didn’t own 50% of the partnership, and the partnership had a 401(k)/profit-sharing plan, then you would be able to get $53K into the partnership 401(k), and another $16K into an individual 401(k).

Ok. I will find out details on the current plan. What if instead of the 1099 call pay going into my scorp I had it go directly to me. That would bring my salary up to the 120k (Scorp) +80k (call) = 200k that increases the amount I can put into a 401k and maybe gives me the option of a second individual 401k for my call 1099 pay. Is that right?

OK. I will find out the details on the current plan.
What if instead of having my 1099 pay From call go into my S Corp. I had a good directly to me? That would bring my total salary to 200 K. 120 K from S Corp. salary and 80 K from call pay. That would increase the amount I can contribute. Does that also give me the option of a second individual 401(k)?

I think you’re better off separating the jobs. Taking $200K in salary from the partnership and getting some kind of 401(k) there. It may cost you some matching dollars for employees, but if they contribute enough you could put as much as $53K in there. Then take the other $80K not through the S corp and use that to make a $16K individual 401(k) contribution. But a lot of it depends on what this current plan is and how the practice is structured.

I agree that due to his practice situation (with employees) he needs some professional help sorting this all out.

You have to be extremely careful with a defined benefit plan. If your partner leaves you with this plan, you might be on the hook for a lot of money, not to mention the termination fees can be pretty steep ($10k is not unheard of). Before becoming a full partner, you should figure out the type of plan he has, and possibly ask him to unwind/terminate it (at his cost). If this is indeed a DB plan (not a profit sharing plan) that is. Employees are not asked to participate – they simply get a contribution from the employer. If he had a plan for just himself, then it wouldn’t be that big of a deal, but with employees, you can’t mess that one up as there is a huge liability to make sure everyone gets paid out what they are due.

WCI, I believe that Fox has employees in that practice, so that makes the matters much more complex. The practice 401k plan would have to be evaluated based on the practice demographics. As long as he owns 50% or less of the practice, he’s fine as far as having a second plan for the 1099 hospital income. The actual salary he would need for himself would depend on multiple factors. For example, to max out the plan at $53k, with employees, he might be able to do that with say $180k. But employer contribution could be very high. However, at $220k he would also max out the plan at $53k BUT the employer contribution might actually fall significantly.

We just did a design study for a doc, and it turned out that by increasing the salary to $230k saved them as much as $20k in employer contribution vs. keeping the salary lower.

Bottom line: Fox needs to sit down with someone to evaluate the plans they have as well as to figure out the best plan for their practice given that both will now the partners. Lots of moving parts here.

He did say it is a defined benefit plan and that it is a closed plan and that I can’t be added. Hopefully if that’s the case I wouldn’t be on the hook for anything, but thanks for the red flag. I never would have thought of that. I will definitely look into it before taking that partnership step. We do have about 6 employees and he has made contributions for them in the past.

The plan is either terminated, frozen or active. You’ll need to find out which one it is.

Does he also have a 401k plan in addition to a DB plan? The problem is that some of the older docs are not very meticulous when it comes to retirement plans, so you don’t want his problems to become yours. This is true especially with the plans that have been around for a long time.

Update:
To answer an earlier question I am paid by K1 from partnership.

I was finally able to speak with the pension provider for my partner. There are currently 2 plans: a defined benefits plan which is frozen and a profit sharing plan which he has been contributing on behalf of the employees.

I asked him to do an analysis for my current situation and practice. He says he is going to run the actual numbers but he doesn’t think any qualified plan will be worth it for me. He says because most of the employees are older than myself and because of the expense of matching contributions it wouldn’t be worth it. He says as you alluded to I’m in a very unusual circumstance.

He also said that I could not legally have a separate plan for hospital 1099 income based on it being a controlled group.

I believe he understands my practice situation well as he has worked with my partner for nearly forty years. It does make me wonder if he has conflicting interests (what’s best for me is not necessarily what’s best for my partner) and maybe I need a second opinion. If his recommendation still doesn’t change after running the numbers it looks like I may be stuck with a taxed account. Frustrating! Thanks for your input.

The frozen plan has to be terminated by your partner. You can’t be stuck with it. The cost of doing so can be way too high.

Sometimes it is obvious and sometimes it is not. You might be fine for a while as long as your partner still participates in the plan. Let him run a cross-tested plan design and show you the results. If that one fails, chances are your employer contribution might be too high, but he has to make a good effort to optimize the numbers to make sure that he does all he can to give you a good design. Sometimes it is just not possible, but the numbers will show it. Then you might want to have another TPA do a design illustration to see how these two compare. If he refuses to do this for you, get another TPA who will do what you ask of them.

I don’t think he is correct about your 1099 income. As long as you own 50% or less of your practice and you own 100% of your 1099 entity, your total ownership in both entities is less than 80% so there is no common control. If somehow your 1099 income is related to your practice income, that would be something else entirely (an affiliated group). So I believe that based on these facts, you can indeed have a solo 401k for your 1099 income. Things will change when you become 100% owner though.

Great post..
Looking at example 3,
If I have 18k 403(b), 18k 457(b) from my employer that makes a total of 36k of contribution.How much I can contribute from my 100k 1099 income towards Individual 401(k)

So here’s a question I probably need an accountant to figure out. I made about 15K moonlighting last year. Does it make sense to deduct some of my medical expenses (license, board certs, etc) as business expenses (aka lowering net profit of my sole proprietorship), or as personal?

Here’s the catch, I have a SEP IRA for my moonlighting “business”, so less expenses (more profit) for my business lets me contribute more to that. Don’t have any other above the line options. It makes my head hurt to figure all this out, and makes me realize my taxes may finally be complicated enough to justify an accountant….

At some point you might consider changing your SEP-IRA to a Solo 401(k). Fidelity’s Solo plan accepts IRA rollovers. This is what I did so at to have no hindrance from the pro rata rules for my yearly Backdoor Roth.

Yes you can, but not worth opening a SEP at this point and having to do rollover for just $2k. Just open the solo 401k. I like solo 401k over SEP because if you don’t have a good plan at work, you might want to contribute the salary deferral into the solo 401k, not the SEP.

Hi,
what would the best way to invest in my situation
job #1
Full time hospitalist,w2 job,Roth option available
457 governmental with 5 k match for 5 k I invest ,immediately vested.THROUGH VALIC[not the best choice of funds]
JOB#2
part time w2 job

You can always save in a taxable account- index funds, real estate etc. There’s no reason you’re limited to just retirement accounts. Remember as you add up your totals that you only get one employee contribution- either the 401(k)/Roth 401(k) at job # 1, the 403B at job # 2, or the employee portion of the individual 401(k) at the 1099 job. If one of those first two jobs is giving you a match/employer contribution, then make sure you get it. If not, use the rest of the employee contribution in the individual 401(k). The 457, HSA, and backdoor Roth, of course, are separate.

Also be sure you look carefully at the update to this post about 403(b)s in Rule # 7.

It doesn’t sound to me like you qualify to open an individual 401(k). You can obviously do a backdoor Roth, pay down some loans, save up a downpayment and have your $18K (or whatever you’re allowed to contribute) ready to go at the one year mark (allowing you to frontload it.)

Yes, that is exactly what I mean. Thank you for directing me to that article by Mr. Adkisson. I find that once high income earners max out their contribution to a qualified plan, they like to take advantage of the unlimited maximum contribution feature of the nonqualified plan.

I appreciate the emphasis in that article on the need to have a plan. In my experience, people have created problems for themselves when they take the “stop-and-go” funding approach.

I wonder if you have an investment property held in LLC, which you’re sole member of, whether or not because of this LLC you can establish a solo 401k and contribute some (if not all) rents from the said property into that 401k?

I own 25 percent of our medical practice. I own 100 percent of an LLC that is a consulting type business. Do I meet the controlled group “second type” criteria? Can I have two 401k? The one for the main medica group is where I put away the 53k. Can I open a second 401k for my consult business? Thanks.

I think you can. As I understand it, a brother sister group is one where 5 or fewer own 80%+ of both businesses. Since you only own 25% of the first, and none of your partners own any of the other, I think you’re okay. This is similar to my business where I own less than 1% of my practice partnership, and 100% of WCI. Wouldn’t hurt to get a professional opinion on this from your accountant.

Solo 401(k) – Contribute remainder of employee contribution ($7k) (since I have better investment options here than in practice retirement plan thanks to senior partner there who believes strongly in active management and just happens to have a child employed as an adviser by Edward Jones!) + 20% of net 1099 earnings

Wife’s 403(b) – Works part-time so her entire salary goes here until she reaches $18k

I was thinking of opening SEP by 4/15/15 to maximize this year’s taxes. As well as, starting the back door and stealth IRAs in 2015. Is this a good plan? My husband is a Doc as well, could we open a “brother/sister” company for the upcoming years? Or am I missing the difference in controlled vs uncontrolled? (which is possible.)

As long as they don’t have non-spouse employees, they should be able to do a solo 401k plan, unless each of them own other companies with employees. If they are both W2 employees and have their own joint venture, they will most likely be ok. In any of these cases they should talk with someone do address their situation in detail.

ER physician employed with large group, approximately 330k yearly. My company allows a total of $53k contributions to a 401k. I also work part time on an independent contractor basis for locums agency, making approximately $100k doing this. Married, age 44, wife does not work. Can I put any money from the locums job into a side 401k or other account? Any thoughts would be appreciated.

Sure, you can probably put ~$20K as an employer contribution into an individual 401(k). Whether you can do the $18K employee contribution into that too is a bit grey. I do, but I can understand why others would not feel comfortable doing so.

Thank you very much for the edifying comments. However, I want to clarify something. What is the legal justification for making my wife an “employee” when she is not a physician and I am the only one earning an income in our family? Wouldn’t it be difficult to explain this if the IRS ever came knocking on my door? Also, just to make sure I understand, the potential solo 401k maximum income would still be $53,000, even if I made more than $260,000 in the locums 1099 job, right?

I am a little confused about how you would designate employer vs employee money into a solo 401k.

At my main job (W-2 and partnership) I am able to put away 53k into a 401k. This is my employee contributions of 18k and then the remainder is match and profit sharing.

I also work for a locums company at a separate hospital and get paid on a 1099. So far this year I have made 25k that money is currently just sitting in a bank account untouched.

So my understanding is that I can set up a solo-401k since it is a separate employer and then I can put 20% of my income into that solo 401k. If I set up the solo-401k today how would I contribute the money I have in the bank account now (ie when I make the contribution how do i specify that it is employer money and not employee money since I have already hit the 18k cap on employee contributions).

My main job is partnership that I get paid on a W2 and I am about 2% owner of the group that is an s-corp. I put in my own 18k to a 401k and then with profit sharing and match I hit 53k in the 401k each year.

The past year I have made 50k in moonlighting on a 1099. I called fidelity yesterday to set up the solo-401k and the guy on the phone said it sounded like I could not do a solo 401k because of the control group situation mentioned above.

I am also confused if I actually can set up a solo 401k and if I do – how I make sure the contributions are designated as the employer contribution and not the employee (since I already maxed the 18k employee).

After reading your “where to open your 401-k” I was planning on opening one with etrade but when I called to ask questions about setting up the solo 401k they seemed clueless. I was asking if I had to list an employer on the paperwork to open the account or if I just listed myself. He had no idea what I was talking about. Maybe I will just go with Vanguard.

I feel uniquely qualified to address your Etrade vs Vanguard issues given that I have an i401k at both places. Currently, I have my assets split equally between the two. I’m an Etrade “Elite” and Vanguard “Flagship” customer.

1. You have an equal chance of getting someone clueless on the phone when you call either institution. I recently opened a i401k at Vanguard. The process was frustrating. In contrast to their personal account representatives, the Small Business people were useless. In fact, I enlisted the help of my Flagship CFP rep to help and she was frustrated too. My questions weren’t that complicated! if you go with Vanguard, ask for supervisor, Steve Campo #36905 — you’ll save yourself a headache.
2. At Vanguard, you are limited to Vanguard Investor class funds. There is no brokerage option. All trades are commission free. As an Etrade Elite customer, you have access to the entire line of Vanguard mutual funds ADMIRAL class as well as the entire world of ETFs, stocks, options, etc. Trades are NOT commission free but my Elite rep gets them waived any time I call him and ask.
3. At Vanguard, you can only register/use one checking account for ACH deposits. So, if you want to do deposits to your i401k from you business checking account and deposits to your ROTH 401k from your personal account, tough luck. There is NO other way to make that deposit other than mail in a check . . . .not that a big deal for me cuz my Flagship rep sent me a stack of prepaid FedEx 2 day envelopes. Etrade allows you to register multiple checking accounts and use them in any way you like.
4. Etrade’s web interface is easier to use. Everything is on one site. With Vanguard, you have to use the Small Business site and the Personal site to accomplish everything.

So, the take home, you’ll be fine with either place. Forced to choose one: if you have a simple investment plan (no commodities, alternative funds, etc), are just starting out (i.e. account balance <$1000000) and don't mind the extra administrative hassle, I would go with Vanguard. If you have a larger account, fancier objectives, want less hassle, I would go with Etrade.

Not sure I understand what is going on with your # 3. I have certainly linked both the personal checking account to my personal Vanguard account and the business checking account to the Vanguard small business account.

Hmmm . . . . Do you have an i401k and a ROTH 401k? If so, how do you make contributions to your ROTH 401k account?

Vanguard only allows me to contribute to my ROTH 401k and i401K via Vanguard Small Business site. This site allows only ONE checking account to be linked. I prefer to make EMPLOYER contributions to my i401k account from my business checking. It follows that I like to make after tax, EMPLOYEE contributions to my ROTH 401k from my personal checking account.

Maybe you know something that the Vanguard phone reps and I don’t. How do I contribute to i401k and Roth 401k accounts using different checking accounts?

I have the Roth option on both my i401(k) and my partnership 401(k)/profit-sharing plan. Obviously, it’s $18K total Roth contributions if I ever choose to do that. At any rate, when you contribute online at the Vanguard small business site it allows you to choose employee/employer and Roth/traditional and it can all come out of your business account (or even your personal account.) I don’t see why you’d NEED to link 2 accounts. Just because you like to doesn’t mean you need to. In fact, I wouldn’t make any contributions to an i401(k) from a personal account. Think about how a regular 401(k) works- the employer withholds the money from your paycheck and sends it directly to the 401(k). Pretend you’re doing the same thing as the “employer.”

Chris |
October 23, 2016 at 6:51 pm MST

My 401k with my previous employer didn’t work that way for me. I would mail in a check for $14k, $15k or whatever the Roth contrib was at the end of the year because my last paycheck rarely had that amount as take home pay. Why, you may ask? I’m often unsure how much money will go to each until the end of the year, which, obviously, makes payroll deduction all that much more problematic. (i.e. I wish my take home was $24k in December).

Thanks for your input and for the work around/trick . . . .I’m sure there are others too!! I don’t “NEED” to link 2 accounts: it’s just easier that way. To use your example (if I understand correctly) I would still make the ROTH contrib using the VG site and my business account. I could “pretend” the money sent from my corporate account was my personal, after-tax money and then transfer the $$ from my personal account to my corporate account . . . .but why should I even have to do all that?!?! Is it my job to make things easier for Vanguard? Wouldn’t it just be easier to be able to do it directly from the Vanguard site . . . . .just like I can from Etrade.com? Maybe it’s my age but I guess I have higher service expectations (in other words, unrealistic) from my custodian.

FYI, I received a follow up email from my Vanguard Flagship rep who said the Small Business Site will be getting that feature “in the near future”. Apparently, I’m not the only guy out there that does things backwards.

That’s not true, there is no controlled group here. Yes, you can do a solo 401k and also you can do after-tax contribution so that you can contribute the entire $50k into the plan. It would have to be custom-designed plan document to allow that to happen though.

Never rely on the company to tell you what to contribute and what you can and can’t open. They are mostly clueless and are not supposed to provide tax advice (or any type of advice for that matter).

Within the account itself you should be able to distinguish between employee and employer contribution.

Would it be as “grey” if instead of an individual 401k, one utilized a SEP-IRA where 100% of the contribution is considered to be by the employer? That way you don’t have to worry about exceeding the $18k total max employee contribution to one or more retirement plans.

I’m a little lost. I’m not sure what you’re referring to as grey. But it’s relatively easy not to exceed the $18K limit. When I make contributions to my solo 401(k) I designate them either employee or employer contributions.

Right, you’ll need to set up a Solo 401k together with a Solo Defined Benefit plan. Then roll the SEP into your solo 401k. You can open the solo 401k at Vanguard but you’ll need a custom plan document to allow rollovers and get you low cost Admiral shares. Then as WCI said, you can do the backdoor Roth.

Now it does. Thanks to my TPA alerting me to one little known fact. I’m actually writing this up for Quantia MD as we speak (and if I have time I’ll give you a post on this). How to turn your Vanguard solo 401k into the best 401k in the world. You can get everything you want: incoming rollovers, outgoing rollovers, in-plan Roth conversions, Admiral shares, brokerage option, with a custom-designed plan document (that doesn’t cost much). Then all you do is open a pooled plan account at Vanguard (called VRIP), roll all of your traditional IRAs into it, and call it a day. We started doing this recently, and it works like a charm. After $250k in assets the TPA does the form 5500, and that’s it.

Cool, good to hear. I’m very interested in getting Admiral shares in mine. What will you set a pooled plan up for? (Bearing in mind it’s only going to save me $100 a year per $100K in the plan in lower ERs.)

The TPA does this, I don’t deal with this personally (unless I’m asked to manage the assets). I think it is several hundred for the plan document and several hundred more to file form 5500 each year if more than $250k in assets. Nothing like the cost of doing a full blown pooled 401k plan, but the process is actually identical – same application. I’ll send you her price sheet for this. Very reasonable, and from what I understand very few TPAs do this at all.

For a 12 asset class portfolio, that’s exactly the number. However, don’t forget the ETFs. You can get an ETF portfolio that costs 0.1% for as little as the cost of each share! We never planned to sell this as a ‘product’ – rather we’ve had multiple requests for this feature, so the TPA found a way to make it worthwhile. The TPA services (annual 5500 reports) are not required until you break $250k (and you can file them yourself, but I wouldn’t do it to save a couple of bucks). Most importantly, you can consolidate your assets at Vanguard and you can add the incoming/outgoing rollovers. I don’t know if Fidelity allows outgoing rollovers, which is a requirement if you want to have in-plan Roth conversions. I’m not sure if you are aware of this, but you can convert any in-plan assets regardless of how old you are with the new IRS rule. This is the ultimate new Mega Roth strategy, but it is only possible if the plan document is created appropriately.

It’s a two page form: http://www.irs.gov/pub/irs-pdf/f5500ez.pdf The instructions are only 6 pages. As IRS forms go, that one is hardly intimidating. Seems like a pretty quick way to save $250-300. I’d rather pay someone to do my Schedule C than that one.

I’ve been told by the TPA how easy it is to mess it up. Yes, some people do their own taxes and file their own 5500 forms, but from what I’m told, many people (especially doctors) who think they know what they are doing often get things wrong, and IRS does not like that. I am all about savings, but when it comes to this stuff I try to think about increasing revenue rather than trying be a penny wise. You don’t want to pay even more for voluntary compliance (ask the TPA about all of the 5500 form mistakes she has seen).

Well, obviously if you’re not going to do it right then you shouldn’t try to do it yourself. But many advisors like to try to convince docs that they can’t do anything themselves, and that’s just not true. Everyone is somewhere along the continuum between know-nothing/do-nothings and do-it-yourself diehards. Those who read 101 comments into a post on multiple 401(k)s, however, are generally pretty far to the right and willing to try doing stuff like a 5500 EZ. Those who hire folks like you and your TPA are far less likely to read this blog post, much less the comments.

Yes, I agree, but you might be surprised that for every person who posts here who does everything themselves there are many more lurkers who are not that confident and need advice. I admit that I have a conflict of interest: I happen to make money for offering advice. But honestly, most advisers can care less if their clients fill out incorrect 5500s and mess up their solo 401k plan. I’m an extremely paranoid one – I just don’t trust myself enough to know everything about everything, and even if I read your blog every day, I still have to call up my TPA, attorney, CPA and everyone else I know to make sure that what I’m doing is correct because I really don’t want to allow even a small chance that my clients mess things up. My standard of service is just too high to allow for a casual ‘yes you can do it if you read a blog post’ attitude. Of course many things can easily be done by reading a blog post (and you have the best ones around, period), but doing your own business taxes and filling out your own 5500 form should probably only be attempted by those who know for sure that they can do it. Everyone else can save themselves time and trouble and hire a professional to do it (or at least have one check their work), and there are many good ones out there who can do it well. Again, that’s not to say that they should hire someone to do everything, but some things are just easier to outsource. At some point when your earnings are high enough, an extra couple of hundred bucks isn’t going to save you money for a service that might be worth a lot more to them. Again, I want to thank you for your blog and for the opportunity to post!

I would agree with WCI on being able to do your own 5500 for solo 401k plans only. There are no HIE or discrimination tests, its pretty much an informational return. If there are employees who are covered (whether or not they contribute) then a TPA is certainly a must.

Konstatin, I understand your resolve to say you have the highest standards of everyone around, but come on, there are lots of great advisers out there who know what they are doing and are credentialed as well. Saying you have the highest standards of conduct yet having no credentials nor regulating body seems misguided to me. There are people out there that know that there is no actual regulatory body for people who call themselves “financial planners”. This is a loophole, the only regulatory body out there is a voluntary one, the CFP Board. Believe it or not it is easier to call yourself a “financial planner” (no regulatory body) than a “financial advisor” (FINRA). You seem like a very bright person, why not go for the highest (available) standard CFP or CFA since you speak mostly about investments.

The only thing I’ll say is this. I will not take the CFP brand seriously as long as CFP allows its holders to sell products, charge high asset-based fees and cease being a fiduciary when it suits them. With fiduciary ‘standards’ such as these, my standards are much higher, and I don’t need any regulatory body to stand between me and my conscience.

Besides, my primary interest in in helping small practice owners open and manage low cost retirement plans, so my role is primarily that of an ERISA 3(38) fiduciary – there is no need for me to get an alphabet soup of designations to provide a much better service to my clients that can be obtained from the alphabet soup holders (which by the way can do exactly as the CFP holders: charge asset based fees and sell bundled products, and STILL claim to be fiduciaries).

Being a fiduciary is just so much more than any regulatory body can handle that I’m not holding my breath that any designation is ever going to come close to mandating everything that is really necessary to provide the best service to the clients.

That would be like my wife telling me she didn’t want to be an MD because she didn’t like how some MDs practice medicine. Your argument against being a professional is ridiculous. Why not go for CFA then? I mentioned that before because you seem very investment focused. You mention that comprehensive financial planning is what you offer but I pretty much only see your posts on investments.

Thanks for all the great articles. Can you give me your opinion on my situation. I think it is fairly common for ER docs.
Full Partner in small democratic group. 401 k profit sharing plan with $53,000 put away each year. All put in by the company.
Job #2 I work 2 shifts a month as an attending at the Academic hospital in town. It is a completely separate hospital system and group in town I am a employee and make about $50,000 from this. No benefits from this group and they say I am not eligible for any sort of retirement plan thru them because I am only part time employee. Payed as W2 employee (part time).
Can I open a solo 401k or SEP for the job I work at 2 shifts a month? How much could I put away each year into this? I also do back door roth IRA and a backdoor ROTH for my stay at home wife as well.
Thanks, Johnnie

Here is my situation, my wife is finishing residency in june as W2, will start as 1099 solo contractor for separate hospital in July. She can contribute to 401k without match for W2 job, planning to start solo 401k for job starting in july. If she puts 18K employee contribution to the first job will she still be able to do 20% for solo 401k for the 2nd half of the year? thanks in advance, long time lurker, first time poster.

job 2 1099 2nd half of year. 18k contribution+ match( total of 2 up to 20% of net income) or would it be 0 employee contribution + match/PSP=20% net….I guess what I am really asking is if she can just have match/profit sharing for the solo 401k for the 2nd half of the year if she has already maxed out 18k employee contribution the first half. Thanks again WCI

Nope. You do not get two $18K employee contributions. Only one employee contribution. But, that second half of the year you can put in a little less than 20% of gross earnings. So if you make $25K as a resident the first half of the year, you can put $18K into the employer’s 401(k). Then you can open a Solo 401(k) and if you make $100K the second half of the year, you can put ~ $19K into the solo 401(k). Alternatively, you can skip the employer’s 401(k) all together for that year, and put both the $18K employee contribution and the $19K employer contribution into the individual 401(k).

Jim,
This topic has generated so much interest that it would be nice to capture all of the different scenarios into a book. Clearly, this would be a #1 seller, not just for doctors but for any businessman. if you can co-author it with an ERISA attorney, that would add lots of credibility and interest. I’d buy the book for sure.

I maxed out my 403b at employer A in 6 months, then switched to employer B in 2014. Employer B started putting my money into their 401k, but realized the mistake and refunded me the money after it appreciated in their funds. I just got a 1099 from them for about $3700. I also got a 1099 for about $1000 for a junior faculty scholarship from a medical society.

My question is can I put some or all of this 1099 income into a solo 401k and if so, can I still do this for 2014 if I get it done before the end of March?

The first 1099 is definitely unearned income, and thus can’t be used to fund a Solo 401(k). There are different kinds of 1099s.

The second 1099 could possibly be earned income (it would take more research to know for sure) but there seems little reason to go through the hassle of a solo 401(k) for a single $1K contribution unless you need it for another reason (like rolling in a traditional IRA.)

This is a dangerous post because many of your readers contribute to 403b plans. These have a fundamentally different structure from 401k plans. An individual cannot circumvent the 53k limits (plus catch up) by himself or herself with a solo 401k if he or she is mainly contributing to a 403b. They can do it with a working spouse who has a 401k. Also, the 457 limits are separate, as you noted. I think you provided a nice synopsis for 401ks. But notice how many of your readers immediately tried to extend the logic to 403bs. That’s the dangerous part.

It’s not clear to me what you are saying the problem is. 403(b)s don’t typically get combined with profit-sharing plans. All of an individual’s 403(b)s and 401(k)s share the same $18K per year employee contribution. However, they each have their own $53K total limit for employee+employer contribution. Am I missing something? What do you see as the “dangerous” issue?

(BTW, you and I have very different views of what the word dangerous means. There is nothing I do with investments that I consider “dangerous.” Dangerous is giving potassium infusions at “ER TKO” rates or rappelling off a bag of sand in a canyon. Worst case scenario with screwing up your investments is you have to pull some money out and pay some penalties. Yes, it’s a pain but hardly dangerous.)

Sorry. Dangerous is too strong is a word. When I read your post for doctors, I guessed that many of your readers would have 403B plans and try to apply what you wrote to their specific situations. Sure enough. Several of the comments above are about 403Bs.

The main point they should know is that if you’re in a 403B at work and you set up an individual 401K, you control both of those (e.g., the moonlighting hospital employee above.) There’s only one 53K limit for all employer+employee contributions. 403b’s are different from 401k’s in this regard. It seems like it’s an important enough issue to doctors that you should crosscheck this point with a trusted source and perhaps post more about it.

I agree, if that’s true it’s a big deal. Do you have a reliable source/link for that assertion? I couldn’t find anything on it. I did learn something new about 403(b)s while I was researching though. They have a second type of catch-up contribution above and beyond the over 50 one.

I do not believe that this information is correct. Both 403(b) and 401k are subject to section 415 and 402(b) limits, which means that each plan is limited to $53k from all sources and that salary deferral contributions to both plans are aggregated (so a maximum of $18k can be contributed into both). There is nothing that says that you can only contribute $53k into both plans, especially if the employer contribution into the 401k plan can be made.

So if you have a solo 401k, you can contribute $53k into that plan even if you contribute $18k into your 403(b), provided that the solo 401k contribution is from profit sharing only.

You are not wrong. Just a misunderstanding. I’ve been there many times before. It is so easy to make mistakes in this stuff, and nobody knows it all (some people who do would never read this blog or post here, unfortunately).

I’m sorry. I should be replying rather than leaving new posts (below). This is the first time that I’ve commented on a blog. Please look at the Boglehead link that I posted below, which includes its own link to a TIAA document that discusses this. The problem is as follows: Laws governing 403B plans were written many years before those governing other similar structures in the retirement system. 430B plans were set up to be controlled by participants rather than the plan sponsor. They’ve evolved over time to resemble 401Ks, but they are not the same thing. A doctor in a university hospital who participates in a 403B controls her plan from the IRS’s perspective. She also controls her solo 401K. Contribution limits for the two have to be aggregated under 415(c) because she is viewed as controlling both.

Talk to the benefits staff of any HR office of a university hospital, and they’ll be very familiar with these rules because, as you said above, doctors and research academics have separate businesses or do a lot of moonlighting and consulting. Normally, university doctors are given very specific instructions about reporting their participation in outside retirement arrangements because universities are now charged by the IRS with monitoring compliance.

As I mentioned above, take the glass-half-full perspective: This would be a useful follow-up to your blog post, especially for doctors. Thank you for being so diligent about following discussion threads on your site.

See chapter 4. It does seem to say that if you own more than 50% of your business that the 415 limit gets aggregated with a 403b!

“Participation in a qualified plan. If you par­ticipated in a 403(b) plan and a qualified plan, you must combine contributions made to your 403(b) account with contributions to a qualified plan and simplified employee pensions of all
corporations, partnerships, and sole proprietor­ ships in which you have more than 50% control.”

Thanks for the link. Chapter 4 actually is just talking about elective deferrals (the employee contribution). What you want is at the beginning chapter 3:

Participation in a qualified plan.
If you par­
ticipated in a 403(b) plan and a qualified plan,
you must combine contributions made to your
403(b) account with contributions to a qualified
plan and simplified employee pensions of all
corporations, partnerships, and sole proprietor­
ships in which you have more than 50% contro

I was wondering if you can take a look at my situation to see what would be best for me…

My main hospital (I dramatically cut my hours back to do more independent contractor elsewhere, but they have great benefits for part time docs) …so no HSA with them…
$42K in 2014 W2 , don’t offer a 401K; I decreased my 403B contributions to $0 a couple years ago because I didn’t want to go over annual limit on my 401K through my other hospital

Independent Contractor through a large group “partnership” where we get a “K1” schedule tax form….. $326K in 2014 ; We can contribute a fixed percentage per paycheck and and then “double self match” and by the time I got addicted to your site late last year, it was too late to increase my contribution to eventually max that out… so I was able to get $44K into a pre-tax 401K.

Other IC jobs (through my LLC, in which I’m the sole employee and a “disregarded entity”) (1099) $145K

Gains from stocks $37K

Wife is very part time: her W2 is only $2K (she didn’t set up a 401K with her currently employer yet)

2 kids currently ($5K in each’s 529 plan yearly- so $10K annually) (Michigan married couples can deduct upto $10K)
Third kid on way next month.

I have not done a BD Roth IRA yet (my tax accountant said it wouldn’t work….so I had to get another one…haven’t met the new one yet)…but I do want to set one up for this year

I plan on max’ing out my 401K with my IC “Schedule K- Partnership” ED with $53K for 2015.

I deduct mileage and business expenses as much as I realistically can.

Do you have any recommendations for anything that I can do now before filing my 2014 taxes to lower my tax burden and increase my retirement savings?

Sounds like you’re a partner, not an independent contractor, if you’re paid on a K-1 not a 1099. Same as me, but it means you have to use their 401(k) not an individual 401(k) for that job. But you should be able to do an individual 401(k) for your actual 1099 independent contractor job.

Why did your accountant say the backdoor Roth won’t work? Is it because you have some huge traditional or SEP-IRA on the side? Otherwise, probably a good move firing him.

It’s probably too late to do much about your 2014 tax bill. For 2015 you can put your $53K into the partnership 401(k) and as much as the law allows into an individual 401(k) for your 1099 work. If you use the employee contribution in the individual 401(k) instead of the partnership 401(k), you should only need ~$175-180K of income to max it out at $53K too.

If you had $37K in taxable income from your stocks in a taxable account, I bet there is a way you can make that more tax-efficient. Be sure to read up on tax-loss harvesting, donating appreciated shares to charity, investing in tax-efficient index funds and muni bond funds etc.

Thanks for the reply.
No I don’t have a SEP-IRA or a traditional IRA on the side. I only have my Partnership’s 401K account and a 403B at my “main” hospital that I haven’t contributed in a couple years due to not wanting to go over my annual limits.

My accountant just said about the BD Roth IRA…”it won’t work” and didn’t really get into it, and I just accepted it. He was kind of old school, and acted like his time was more valuable than mine. That was when I first started on your site last year. Now I know that it does work and has worked… Yes, he has been fired.

You might want to consider a solo defined benefit plan for your LLC income. We start considering these plans for doctors as young as 35, though the optimal age is closer to 38. This is a great plan to have, and you can potentially contribute as much as $60k which can increase every year. However, with your income of $145k, even if you pay yourself the entire salary as an LLC taxed as S corp, your solo db contribution will be only $30k, so this may or may not be worth it.

You can potentially have a solo 401k for your LLC, but you will be limited to profit sharing only (so about $30k). If you have a solo db for the LLC, the solo 401k profit sharing contribution will further be limited to 6%, so with only $30k DB contribution, you might stick with a solo 401k for now if your income is going to be around $145k.

Love the book and the Newsletter! Thank you for the valuable insight! I have referred all of my dental and orthodontist friends to the book and website. Even bought an extra book for one of the recent grads!

I am a 45 YO orthodontist (recent grad 3 years ago) in a solo S-Corp practice. My salary is $180,000/yr; S-Corp distributions amount to another $300,000 or so. We have a practice 401k where I max out the $52,000/yr. I get to keep about 72% of what I put into the 401k since I have to do profit sharing for the employees. I have quite a few older employees, so the ratio is not that great in my favor. I have had several firms look into optimizing it, and that is the best they say it can be until some of the older people retire and my age increases. We have looked into a defined benefits plan, but due to the poor ratio of what I put in to what I get to keep, it did not seem to make sense.

My wife is an engineer who makes around $110,000/yr. We have a $900,00 of practice debt (2.8% for 5 more years) and $120,000 in school loans (1.8% for 18 more years) as well as two rental properties ($100,000 left on each 15 yr mortgage 3% and 3.5%). Thanks to you and a nice practice and my wife’s job, we have already been able to eliminate our higher rate loans. She maxes out the $17,500-18,000/yr pre-tax at her job for the 401k.

My wife and I have both been doing the Back-door Roth’s for the last couple of years, since you brought those to our attention (Thank you–our accountants finally agreed after we explained it to them). Also our 6 YO daughter is on the payroll starting this year to fund her Roth IRA.

My wife is also on the practice payroll $3,000/yr to help pay for travel for CE trips and quarterly Shareholder meetings.

My questions are:

1) Would it be possible (and would it make sense) to increase wife’s salary at my practice and start a 401k contribution at my practice (currently she just has the $3,000/yr salary at the practice) since we are in a high tax bracket. (Alabama also has a 5% income tax). Not sure if the tax savings would overcome the additional payroll taxes, but looks like it would, the answer would also depend on what income tax bracket we will be in when we retire. It could make her a highly compensated employee too, so I may have to run it by the 401k custodian.
2) Should we take additional money now to pay off debt (highest rate now is 3.5% on a rental which we get to deduct some of anyway) or invest the difference. The bulk of our funds are at Vanguard with Index funds. I know the book addresses this, but wanted to get your opinion. Something nice about just getting out of debt, especially with the unknown of the stock market.
3) Do you have any other suggestions that could help us out.

Careful with the 6 yo on the payroll. Might be tricky justifying that in an audit. You may have to convince an auditor that you would have been willing to hire another 6 year old at that price to do that same work.

1) Yes, but she has to do a job that would be worth it. You can’t just throw money around saying it’s “salary my wife, niece, 6 yo etc etc.” Definitely run it by the 401(k) guy and probably your practice accountant too.
2) 3.5% is pretty low once you deduct it at your bracket. Probably okay to carry it and invest, but if you want a sure thing…

About your 401k. There are other types of designs that reward those who contribute. If nobody contributes, they will not get a penny (and this is legal and approved by the IRS). If you know exactly how much your employees defer (if anything at all), then it would be rather easy to estimate the cost with this type of design (it is called Triple Match). We often use such designs with older employees, and sometimes they work better than the alternatives.

1) As WCI said, you need to follow the right process, but you can increase your wife’s salary to about $20k or so to max out her 401k plan contribution. Here’s more information on how to do it:http://www.crossroadstax.com/blog/hiring-your-spouse-for-your-practice-make-sure-the-numbers-make-sense
2) What is the tax equivalent interest rate on the debt? If you get a tax deduction on the interest, your effective interest rate is what matters. If it is low, under 2.5% or so, you can easily purchase individual municipal bonds that yield 3% or more, and pay down the debt using the interest payment, for example. If it is closer to 3.5%, I’d pay it down quicker.
3) What about adding a Cash Balance plan? This is also something that might work, or at least something that can be tried (even with older employees). Chances are you can significantly increase your contribution while not having to add anything on top of what you are already contributing to your employees, and at 45 that’s the optimal age to start contributing significant amounts ($100k or more).

My wife already maxes out her pretax 401k of $18,000 at her other job with her employee contributions (she also get a company match at that job).

Can we still contribute her salary from her job at my practice (I’m thinking $20,000 per the link you attached) to employee contributions–I think the answer is no.

Reading back on some of the original blogs, we may only be able to contribute a portion of her salary from my practice to the 401k at my practice (maybe 18%), plus the company match to her 401k at my practice?

How could we maximize her 401k fund between both of her jobs in this situation?

You are right, the answer is no. But she can contribute just enough to get the match, and put the rest into your 401k plan. If your plan has better investments (low cost index funds), and matching + profit sharing, this might be a better tax move for you. But you also need to consider the fact that you’ll pay FICA taxes on her salary. Talk with your CPA about whether doing this will be worth it for you.

A little late to the conversation and first time posting. Wanted to thank WCI for saving me from myself multiple times. Had a quick question though to confirm that I’m doing everything I can to maximize my tax-advantaged contributions. I’m have only one employer (W-2 employee at large academic institution) where I personally contribute

Is there any mechanism where I can take advantage of the remainder of the 53k limit (53-18k = 35k) for contributions to my 403b seeing as I am already making the full employee contribution of 18k or any other vehicles that I may not be taking advantaged of as a employee of a one one entity?

No. Not unless you have some 1099 income somewhere. Sounds like you’re pretty much maxing it out. (I assume you’re single, otherwise you could get more into the HSA and do a spousal backdoor Roth IRA.)

59K total = 53K to maximize under the 415(C) limit + 6K for the > age 50 catch-up contribution

I was excited to learn from your website about the MegaBack Door Roth conversion from after tax 403b/401K contributions as that is a very significant benefit for those whose 401B/403B plans allow In Service distributions.

Do you feel that there there any taxes triggered in the year of the Mega Back Door Conversion from either
1) appreciation of the After-tax contribution while in the 403B account prior to In Service distribution/Conversion to Roth IRA, or
2) due to the fact that there are pre-tax $ also held within the 403B (employee or employer contributions)?

Job 1 – partner track w2 – 401k – I will be contributing max to this 401kand then the company will match at end of year based on profit

Job 2 – Hospital – w2 – no retirement plan offered

Job 3 – consulting LLC – only me

1. Can I set up solo 401ks for both job 2 and job 3? If so, how much can I contribute?

2. since jobs 2 and 3 are PRN, I wouldn’t know how much I earned from them until end of year. Assuming I open 401k for each, what is the Time line for my contribution? When do I make the actual contribuion?

1) Not for job 2. Job 3 will be 20% of your profit up to $53K assuming you used the entire employee contribution in the partner track 401(k)
2) You can certainly do employer contributions up until April 15th of the next year. I’d have to review the rules on employee contributions, but it doesn’t sound like you’ll be doing those anyway. You can do contributions as you go along and then one final one when you do your taxes the next year.

As an above poster similarly asked, I recently joined a private group and cannot contribute to a 401k for one year until July 2016. I have the option to continue a moonlighting job paid as 1099, so I would be eligible for a solo 401k. If that job brings about 12-15k next year, can I still contribute 53k into a solo 401k?

Also, how do you recommend getting money from a traditional rollover IRA that I have, and a traditional IRA my wife has, into another investment so that I can contribute to a backdor IRA. Do you think it would be worth it to put our current traditional IRAs into this solo 401k, and is that even possible?

As Mr. Litovsky said, you can’t put $53K into a solo 401(k) for a job that makes $15K. You can put in $15K if you don’t use your employee contribution at the other job. If you max out the employee contribution at the other job, you can only put in about $3K. Still worth it, but not nearly as useful. You can, however, use it to roll IRAs into if they’re too big to just convert. You could just roll your backdoor IRAs into your 401K in 2016. No big deal. Your wife’s may be small enough to just convert.

Thank you both so much for your helpful replies. AFfter I posted this I tracked down a prior post about Solo 401k that was also extremely helpful. I cannot thank you enough WCI for this website and your book, it has been instrumental in my wife and I in planning feeling confident about our financial future.

One last quick question, if we are making say 300k, 20% for retirement would be 60k/yr. If my group contributes the max 53k to my 401k/yr along with 4500 to an HSA, and I put an additional 18k in employee contributions plus 13k for two back door IRAs, as well as max out the HSA with an additional 2k, is that a sound retirement portfolio, or do I need to be contributing more of my pown money to a retirement account elsewhere? More simply, should I coult the employer contributions as part of my overall percentage of my retirement fund, or still find a way to put 1/5th of my gross income into retirement. Thank you

If your wife can work for you, performing certain duties related to your moonlighting job, then yes, she can join the solo 401k plan for your 1099 income (you will need to give her a W2). If your solo 401k plan is at Vanguard, with a custom plan document you can allow incoming rollovers, and roll all of your traditional IRAs into a solo 401k for both of you. Other solo 401k plans allow incoming rollovers as well by default.

If your moonlighting job brings enough earnings you can max out the solo 401k, keeping in mind that salary deferral between your W2 job and your 1099 job has to be $18k in total. You may or may not want use your W2 job 401k if you make enough income to from your moonlighting job. Vanguard solo 401k will probably have much better investments than those available in your W2 401k plan. Alternatively, you can contribute just enough to get the match, or split your salary deferral contribution between solo 401k and W2 401k if you will not make much from your moonlighting job. In any case, there are several possibilities that are open depending on how much you make as a 1099 contractor.

You have a controlling interest in your two LLCs (80% or more), thus it is a controlled group, so you get just one 415 limit, thus you can have TWO solo 401ks if you want, but together you can only contribute $53k (if this makes sense).

WCI,
my partner has a employed job where she will contribute the max (18K) to her 401k. On the side, she runs a website and does freelance work as sole proprietor (and switching to LLC) where she earned about 12k last year, and on pace for 20k or more this year. If I am understanding correctly, she could open a solo 401k plan but only put in 20% of her total income (4k if makes 20K this year) since her employee contribution has been used up at her day job.

I have a solo 401k as an independent contractor. I also own a small company that sells medical supplies, still developing and hasn’t turned any real profit yet. We structured that company’s LLC so it’s joint ownership between me and my wife. if I understand the multiple 401ks correctly; I can’t really contribute more than the $53k limit since I’m the “employer” for both businesses (physician contractor and the LLC company). if we change the company’s ownership to my wife 100%, that should allow us to have another $53k max limit under a second 401k for the medical supplies LLC (since the 2 would be unrelated), is this correct?

If you have any children, the answer is no. This surprised me when I found out. So you can have two separate businesses owned by husband and wife which are not a controlled group (as long as they are not affiliated in any way, as that can also create issues), but as soon as you have a child, it is deemed to be a controlled group because the child own 100% of your corporation and 100% of wife’s corporation, so the two corporations are a brother-sister controlled group.

That’s indeed bizarre! so I guess I am limited to the one solo 401k I already have as an independent contractor. Any other options to maximize retirement savings using the medical supply company? We already have the solo 401k, an employer-provided 401k, 2 IRAs each (traditional and Roth) and an HSA. anything else that can add to this portfolio?

The one other thing we need to make a decision about is college savings for the kids, not too many great options since we live in CA but will keep evaluating I guess. may be the UT plan?

This one came as a shocker to me, but apparently this is what one of the best known attorneys in the business says. Attribution rules go along with the controlled group rules. So marriage, divorce, children, all of these have an impact on the determination of what’s a controlled group or not, and this is exactly why every case is different and has to be examined on its own merits.

A will is not in force until the passing of the owner though, so that wouldn’t work. A trust is probably what you are thinking of – I guess you can give your company to someone else but the problem is that ‘giving’ will result in that someone having to pay taxes on this gift.

Here’s my situation:
(1) full time employee at a VA hospital and already putting in the full employee contribution to the TSP account.
(2) part time employee at a separate University hospital with pay of only ~17,000. My part time status there doesn’t allow me to contribute to the 403b.

Are there any ways I can apply the income from the part-time job toward tax-deferred savings? I’m already using the back door Roth. I’m not a contractor so I can’t do a solo 401k, right?

Right. You should have arranged to be an IC at the new job, rather than an employee if your goal was to maximize retirement account contributions. (Maybe you can change that for next year, but be sure the pay is at least a little higher as there are additional costs to being an IC.)

1. Full time employee that contributes $18,000 to 401k.
2. Own an S-Corp that is separate from full time employer. The S-Corp earns $300,000 net income.

What is the maximum amount that I can deduct? Does the Solo 401k give me the maximum deduction? What wage do I need to pay myself to achieve the maximum deduction? And does my employer match (from my full time employer) factor into this?

A- $53K (assuming you’re under 50) into your individual 401(k) + $18K into your employer’s 401(k) + the employer’s match.
B- Since it is all “employer contribution” you’ll need $53K/0.20= $265K of NET (of self-employment tax) wages from the S corp. Unfortunately, that is going to negate most of the tax benefit of the S corp and in fact you may no longer wish to have it given the additional costs and hassle.
C- It doesn’t factor into how much can go into the individual 401(k).

My understanding is the 25% includes the contribution and the 20% does not. So either way, it’s the same number. Am I missing something? I vaguely recall a discussion we had in the past on this subject, but don’t recall the bottom line.

Just wanted to make sure we are on the same page. So if you are an S corp, you give yourself a salary, in which case you can contribute up to 25% of the salary into the profit sharing. If you are a solo proprietor it is 20% of the net profit that can be contributed (up to $53k). You’ll need a higher net profit to contribute the $53k as a sole proprietor, though with $300k it is a moot point as you can still max the profit sharing out. Just pointing out that S-corp would probably save the OP more on taxes.

As I understand it from Pub 560, there are special rules when making contributions for yourself. I quote from Chapter 4 under “deduction limit for self employed individuals”, which is what you are if you and your spouse are the only owners of the S corp:

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

The deduction for the deductible part of your self-employment tax.

The deduction for contributions on your behalf to the plan.

The deduction for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

When you use that deduction worksheet, it becomes quite clear that the number is 20%, not 25%, because it includes the contribution.

This makes a big difference. Because if you use 25% and wish to max out a $53K contribution you would only need a net income of $212K, which would allow this $300K earner to declare $88K as distribution, saving him 2.9%*$88K= $2552 in Medicare taxes. If you use 20%, then you need a net income of $265K, leaving only $35K for a distribution, which only saves 2.9%*$35K = $1015. I’m not sure $1015 is worth the hassle and expense of setting up an S corp.

It is actually 2.9% + another 0.9% that he’d save by electing to be taxed as S-corp. He should probably have an LLC established anyway. So the savings are between $3k and $4k, though I think that electing to be taxed as S-corp might have other advantages in addition to some tax savings. Also, if the income grows beyond $300k, the benefit of using an S corp increases.

Probably not. Even though you will only be saving the 3.8% in FICA taxes with S-corp (I actually prefer LLC taxed as S-corp vs. being a full blown S corp),I think that giving yourself $200k salary with $100k in distributions to put in $50k into your solo 401k plan will be better than taking the entire $300k as SE income. You’ll save about $4k in taxes with S-corp (though filing might cost you an extra $1k). It is also much cleaner to give yourself a salary so that you can make periodic contributions into the plan. This is something that I’d discuss with your CPA.

My situation( which I find complicated):
-Mandatory contribution to 401(a) of 13.5% and equal match by the univ( we don’t contribute to Social security). This amount to 22+22=44K
-Contribute to 403(b): 17.5K
-Also work at VA and contributed to TSP, 17.5K.
My accountant tells me I can’t make any contribution to the VA bec of I have already reached my limits at the univ.Is that true?
Are the limits any different if in your job you don’t contribute to social security( My individual contribution to 401 is 22k much above the 18K limit)

Hi Kon and WCI. Please help me figure out if this is a controlled group situation. Though it is probably obvious to you both, I am still learning the rules and could use some clarity. I receive:

-140K on 1099 from independent contractor work as a physician at a hospital (this amount will increase in the future)
– 50K W2 from my husbands oral surgery practice that I help him manage that also has several employees

These two businesses have nothing to do with each other. We have two young children. Ideally I would like to contribute maximum nonelective contribution based on schedule c to my Individual 401k each year, as well an 18K elective contribution and profit sharing to my account with my husband’s business 401k/profit sharing account? In other words, if the total to both is over 53,000, can I still contribute or is this a controlled group and my combined limit to both is 53,000?

I agree with Jim. You can have a solo 401k plan for yourself, but you can’t participate in your husband’s practice 401k plan AND have a solo 401k plan for yourself. Both plans would have to be tested together and your contribution will not be nearly as high as it can be with just the solo 401k.

Your husband can have a 401k plan for himself though, and can contribute $53k into it.

If you really want to max out your contribution, so the following:
1) Get an entity established once your income is higher than maybe $200k or so. It can be LLC taxed as S-corp. You will need to talk to an accountant who understands retirement plans. If your income will increase, you can set your salary high enough to max out your plan and have the rest ‘distributed’ to avoid the 3.9% FICA taxes (not much, but probably worth it if your income is closer to $300k).
2) You can open a solo DB plan and if you are at least 38 years old, you can potentially contribute a lot more than $53k into it together with your solo 401k. This way you can contribute even more than your husband can!

While the filing cost for an LLC/S-corp will be a bit higher, giving yourself a W2 is a lot cleaner, allowing you to make periodic salary withholdings to contribute to your retirement plan, and can save you some taxes if your income is high enough.

Thank you both for your comments. This is such a wonderful site. I do have a couple more questions:

1. At this point if I had a solo DB plan for myself, would it also have to be offered to and tested with my husband’s employees due to the controlled group?
2. Based on previous posts, it looks like if I weren’t also employed by my husband’s business, would we still be considered a controlled group even though we have two completely separate businesses due to the fact that we have children (until they turn 21)?
3. If I were not employed by my husband’s business, would my solo 401k have to be tested with his company’s retirement plan?

1. I don’t think so, but would like to hear Kon’s thoughts.
2. Did you read the comments about that after the other post I linked to above? I don’t think the kids have anything to do with it, but marriage does.
3. Same as above. I think so. Not very fair, but that’s the way the rules are written.

2. Yes, children under 21 cause the businesses to become a controlled group. Very counter-intuitive. Marriage does too, but there are very specific rules about this, and sometimes marriage does not cause common control, but children under 21 always do.

3. I just re-read the rules again, and EVEN IF you don’t work for your husband, and have your own separate practice, it just MIGHT be the case that ANY plan you have for yourself (solo 401k/DB, etc) will have to be tested with your husband’s plan. It will definitely be necessary to hire an ERISA attorney so that they can write a letter of opinion to make sure that you can actually have your own separate plans. Even if the answer is no, then at least you’ll know the reason and will try to find other ways to contribute.

Sorry about that – my brain says YES, but when I read the rules again, I scream NO! This can’t be. I don’t want to encourage you to do anything that you will later regret, so I highly recommend that you speak with an ERISA attorney.

I work with a great attorney who agreed to write these letters in the past for a very reasonable price, so please feel free to get in touch if you have any questions, my email is [email protected].

Psychiatrist w/3 part-time jobs that are not related:
1.County-20hours w/full benefits, nice pension, non matching 457–put in max ie 18grand–long term job
2.tele-psych w-2 includes only malpractice paid and payroll taxes (that the above job pays anyway-long term job
3.Locums 1099 but they are on/off, sometimes whole year, sometimes no work during the whole year and sometimes couple of months here and there.
Can I get a personal 401K for job 2 as a w-2 or do I have to ask the hospital to join theirs and can I get a 401K for locums 1099 work when the job is not stable–for example they may be years where my income would be zero.
thanks and I enjoyed your book and posts.

What I’d like to do is a variation of the multiple 401Ks you’ve been discussing. I am a sole proprietor physician only, so I can have only one 401K – a solo 401K. (My overall limit for 2015 will be the maximum of $53,000.) However, I’d like to have a solo 401K account each at Vanguard and at Fidelity. The reason for this is to have broader investment options when one firm doesn’t have everything I want. As long as I don’t go over an aggregate maximum limit of $53,000 for 2015, couldn’t I effectively hold 2 separate solo 401Ks, but under the same EIN? I need to have the Fidelity because it will allow me to rollover my current SEP, which a Vanguard solo 401K will not permit, but I’d like to have Vanguard mutual funds at Vanguard rather than at Fidelity. Plus, I’d like to to be able to transfer assets between these two solo 401Ks. When I talked with Fidelity, a rep said this was possible, because to them, it would just a transfer of assets between the same vehicle that have the same registration (meaning, they’re both solo 401Ks rather than one being, say, a SEP). Basically, I’d have 2 custodians of my one solo 401K.

I can’t seem to find anything from the IRS where this is explicitly permitted. Fidelity suggested that I get a letter of opinion from the IRS regarding this to cover my bases in case the IRS decides look into this for auditing. Would you have any information regarding this scenario of holding two solo 401K accounts for one business arrangement? Again, there is no intention to make two separate $53,000 contributions into each account. The plan is to aggregate the two accounts to come up with $53,000 for myself. I do intend to call the IRS about this, but I wanted to find out what you knew about this first.

Thanks, Kon, for the link. I read your posting and got excited about the possibility of a custom Solo 401K at Vanguard, until I read how complex it would be to set up. It doesn’t seem all that simple. The initial startup cost is high, and as Jim, noted, it would take about 4 years to break even on the cost of the startup fee (vs. costs of ER in investor shares rather than Admiral shares.) I would prefer to manage the solo 401K myself and do my own 5055 form filing once the Solo 401K reached $250K. I’ll call the person you recommended though to see that I can take on management of my Solo 401K after the TPA sets up the plan document. I need to digest all this some more to see if I want to take on the task of going down this route.

You can still manage the solo 401k yourself. We do custom plan documents for our wealth management clients who already work with us, but only if the numbers make sense. In some cases we do it for associates who plan on purchasing their own practice, but who happen to have some 1099 income, so in fact having a custom plan document saves them the cost of getting a full document down the line (which is about $1500), so when they buy their own practice and hire employees, this plan can easily turn into a pooled 401k plan for the practice (with a simple plan document amendment).

And I don’t think the IRS would allow it either, but I don’t have a definitive source. I do know you can’t have a SEP and a 401(k) for the same business in the same year, and I think this would be similar. At any rate, I don’t see much benefit and plenty of downside.

ETFs are a good idea but unfortunately none of the brokerages allow periodic investment with ETFs (which can be a hassle if you make smaller periodic contributions throughout the year). Other than that, the best of Vanguard’s funds can be purchased as ETFs.

I don’t think that Fidelity has any more or better investments than Vanguard has. In fact, I believe that Vanguard has more asset classes than Fidelity does, so it makes sense to either go to a brokerage that has ETFs or to consolidate at Vanguard.

As I write this, I am currently on a 1 hr. hold with the IRS office to get my question answered, but I relay what they tell me, if I get anyone at the IRS office who knows the correct answer.

To answer your question about what I need at Fidelity besides the rollover option, it’s that I can have a brokerage account and the ability to buy ETFs within the Solo 401K. Plus, Fidelity has the Spartan funds Advantage Class shares that are comparable to Vanguard’s Admiral shares.

I’ve looked at E-Trade and TD Ameritrade as options (using the summary guide weeks ago that you posted), but when I read reviews in previous posts on the Bogleheads forum, I got turned off by reports of individuals’ poor customer service experience, cost of certain trade fees, surprise fees, etc. that it seemed Fidelity would be the better option for opening a 401K. I had considered Schwab until I discovered that there were transfer fees with Schwab. And now I’m reading conflicting information about whether a rollover of my SEP could be done with Schwab.

I’ll still go with a taxable brokerage account with Schwab, but it seems intuitive and following the Boglehead principle of low-cost investing by buying Vanguard mutual funds directly with Vanguard that won’t cost me money to buy vs the cost of some Vanguard funds at Fidelity.

I don’t mind the extra few steps I’d have to take if I can have two custodians of my Solo 401 K in order to do what I want and too keep costs and fees at nothing or minimal. But I get your point that this may end up being a lot of trouble in the end when it comes time to filing my taxes. You have given me caution, though, so I’m duly wary until I get a definitive answer from the IRS telling me I can do this.

Although, I just got off the phone with Vanguard and Vanguard’s telling me that I need to keep all my assets of a Solo 401K if I choose to have their plan document. Fidelity did not give me such a limitation. But, then, on any given day, a different Vanguard and different Fidelity rep will give different information/opinions.

How do you know (i.e., where did you learn) that you cannot have a SEP and 401(k) for the same business in the same year? I cannot find any documentation to that effect anywhere. If anything, it appears that you can have a SEP and 401(k) for the same business in the same year even if you used IRS form 5305-SEP so long as the SEP was created before the solo 401(k). I would prefer to use my solo 401(k) plan only for making the elective contributions and then have my business make its contributions only to my long-standing SEP account at Wealthfront. The sum of the two would be the $53k IRS limit.

Good question. I went looking for a reliable source and didn’t find one in 2 minutes of Googling. It’s possible I’m wrong and you can do both in the same year. Why you would want to is a bit of a mystery to me though. Why not roll your SEP money into your individual 401(k) and start doing backdoor Roth IRA(s)?

I’m a solo practitioner early in my career with my business structured as an S-corp. My wife is also employed by the business as the office manager. Initially, my business only had a SEP in place and payroll was handled by our tax firm but recently we started using a third-party service to handle payroll. The use of this third-party made setting up a 401(k) much easier. The two main advantages to using the 401(k) are that 1. through the use of elective contributions, I can reach the $53k max at a lower salary than I could through the SEP and save on payroll taxes and 2. my wife’s much smaller salary can now save an additional $18k through elective contributions to the 401(k).

The reason I want to continue using the SEP for the business contributions is because I like the investment products available in the IRA market. Namely, I like low-cost robo-advisors like wealthfront, betterment, etc… In particular, I like the fact that Wealthfront and Betterment are able to provide free services such as tax-loss harvesting in our regular brokerage accounts by taking into account our IRA portfolios. Additionally, Wealthfront offers free direct indexing services that I’d like to utilize once my regular brokerage accounts are large enough. Additionally, peer-to-peer lenders, namely LendingClub, are offering SEP-IRA accounts and is a new, non-correlating type of investment vehicle that can be used to further diversify a portfolio. There’s nothing like these services in the 401(k) market.

The backdoor Roth strategy is great and one I definitely want to utilize however, any Traditional IRA contribution we make today is automatically going to be a post-tax contribution. We’re not eligible to make it pre-tax. So our plan here is to make Traditional IRA non-deductible contributions to a max of $11,000 for the two of us also at Wealthfront and then at some later date, years later, rollover those funds into a Roth. We don’t lose out on the tax-free growth in the interim and the need for tax-free withdrawals are at least a couple decades away for us.

I can’t tell from your comment whether you understand the pro-rata rule with the backdoor Roth. You do understand you can’t have money in a SEP and do backdoor Roth IRAs the way you want, right?

That said, a great explanation of some good reasons for using a SEP over a 401(k), several of which I hadn’t thought of before. One thing you could do, of course, is to do a “Megabackdoor Roth IRA” and convert your entire SEP to a Roth IRA each year. Might not be right for you though.

Yes, I’m familiar with the pro-rata rule. If and when we decide to do a Roth conversion of our traditional IRA accounts, we will first rollover the SEP-IRA funds to our 401(k). Because everything deposited in our remaining traditional IRA accounts will then be post-tax contributions plus their growth, the conversion to a Roth should incur zero taxes.

This process is not something I want to do annually for the same reason that I want to continue making contributions to our SEP accounts: I want our tax-advantaged dollars to grow within our Wealthfront SEP-IRA accounts. This is why our plan is to make post-tax contributions to a traditional IRA account and then at some point in the future do a one-time conversion. The triggering event for doing the back door Roth conversion will likely be something along the lines of impending changes to the tax code such as the back door Roth conversion being done away with or tax rates going up.

No one can predict the future, but I optimistically hope that my tax rate in retirement will be lower than my current tax rate. Assuming I’m correct, a “Megabackdoor Roth” conversion of my SEP accounts does not make sense at this time. But I also know that political winds can change tremendously over the next thirty years and I have to be open to changing strategies. A “Megabackdoor Roth” conversion would be a great option in the event of marked increases in tax rates.

In the meantime, converting only the post-tax traditional IRA dollars to a Roth would allow us to further diversity our retirement accounts by giving us a mix of taxable and non-taxable withdrawal options.

Thank you for your reply. I had seen that benefitslink.com thread before but don’t agree with the analysis of the posters. The most common (and only) model SEP plan document that I’m familiar with is the IRS 5305-SEP document. It can be found here: https://www.irs.gov/pub/irs-pdf/f5305sep.pdf

This model document establishes a SEP for a business. It is signed and dated by the employer and it very clearly states that this form should not be used if you “1. Currently maintain any other qualified retirement plan. This does not prevent you from maintaining another SEP.”

The document says nothing about establishing another qualified retirement plan, such as a 401(k), AFTER a SEP has been established using this form. That being said I suppose I could amend my business’ 5305-SEP to make it an “individually designed” SEP.

But I would still argue I don’t need to amend the SEP because I did not violated the terms of the model SEP plan at the time that it was established.

Thank you for pointing out that contribution limits would still need to be respected when maintaining both a SEP and 401(k) for the same business. I think that for a two spouse set up like my business, another thing that needs to be respected is that the business contributions to the need to be identically proportional for both spouses (i.e., if the S-corp business makes a 25% contribution to the SEP-IRA for one spouse, it must make a 25% contribution to the SEP-IRA for the other spouse.) It can’t make a business contribution to the 401(k) for one spouse and only a SEP-IRA contribution for the other because this would violate the terms of the SEP plan (and possibly the 401(k) plan).

So here’s how the total 3 hrs, 43 minutes of total time on the phone with the IRS went – only 13 minutes of which was the actual interface time with a live person.

After selecting the business section option and waiting 1 hr. 43 mins,
1st Rep: Will you please hold while I find that information…I don’t have that information. I will need to transfer you to the ‘Tax Division’.
Me: [Huh?? A ‘tax division’ within the THE tax entity of the Federal Government???]
1st REP: By the way you applied for the wrong EIN type. You selected Sole Proprietorship, but you should have selected the EIN for profit-sharing.”

Brief exchange regarding the EIN, after which the 1st Rep tells me I will need to file Schedule H for the Solo 401K. [Me: OK. Don’t know what Schedule H is for, but duly noted and will file.]

Another 1 hr waiting for the ‘tax division’, then reply from 2nd Rep after I ask him my solo 401K question:
2nd Rep: We don’t answer that question here.
Me: Are you not the tax division that answers questions regarding solo 401Ks?
2nd Rep: Yes, but that question is not answered here.
Me: How am I supposed to know what your department will or will not answer? I’ve waited over 2.5 hours now and you’ve told me you do not answer this question. Is there some reason why you do not answer this question?
2nd Rep: That is not a question that we get training to answer.
Me: Oh, so you don’t know the answer.
2nd Rep: No, I didn’t say that I don’t know the answer.
Me: Are you implying that you know the answer but that your department just won’t give out the answer?
2nd Rep: No, I’m saying that this area does not receive training to answer your question.
Me: What questions do you answer, if not this question, since your own colleague sent me to your division to obtain the answer to this question?
2nd Rep: We do answer tax questions, but your question is not answered here.
Me (With my head about to explode): Do you or do you not know the answer to my question? It’s a simple Yes or No.
2nd Rep: No I do not know the answer. [Finally! It’s because he doesn’t know the answer, not because it’s some privileged secret that only special members get to know the answer to.]
Me: Then where can I get the answer to my question?
2nd Rep: There is a tax department that answers such questions. An email is sent to them with your question and then in 2 weeks to 1 month, you will get an answer.

For all those who might have a tax question for the IRS – I know! Crazy and unheard of, right?? – here’s the email address to direct a question in case you don’t want to wait 2.5 hours on the phone for the IRS tax department to tell you that they don’t answer your question in their tax department but that another tax department will: [email protected].

Me: My second question is, What is the correct EIN type I should have selected when applying online if not the “sole proprietor” type of EIN in order to get a Self-Employed 401K?
2nd Rep: That question is not answered here.

Me (with my eyes bugging out and spleen about to rupture): OH.MY.GOD. Do you answer any questions at all???

I get transferred to the EIN department. Yes, there is a whole EIN department! But there’s not a department to directly answer questions about a 401K. That has to go by email to who knows where.

I get information from the EIN department that directly contradicts what the 1st Rep told me. After the 3rd Rep is not able to answer my question – she keeps reading the general booklet instead of telling me what correct EIN type I should get – a supervisor is nearby to hear the conversation and gets on the line. She was the most knowledgeable of all the 4 people I talked to at the IRS.

Her head almost explodes too when I tell her that Rep #1 told me I would need to file a Schedule H because of the Solo 401K. She vehemently apologizes for the grossly wrong information I was given and emphatically states that Schedule H has nothing to do with a Solo 401K, that’s it’s a domestic schedule for people who have employees like nannies or housekeepers. Wow, how could a Solo 401K have anything to do with a schedule for domestic nannies and housekeepers??

Almost 4 hours after I called, I still do not have an answer from the IRS. I should email them the details of what I posted here, in the hopes that their heads may almost explode too with the absurdity.

I have now forgotten what my original purpose for calling the IRS was.

P.S. The 1st Rep was wrong about my being wrong in selecting the “Sole Proprietor” type of EIN. Per the EIN Department supervisor, “Sole Proprietor” EIN for the purpose of setting up an Individual 401K is correct. The “Employer Plan (401K, Money Purchase Plan, etc.)” type of EIN is only if I have employees and must set up employEE retirement plans for them. Because it’s just me in the self-employed business, the other types of EIN do not apply UNLESS I have another business with employees.

Also, per this supervisor, for all self-employed who file 1040 only instead of S-corp self-employed individuals who also file an additional S-corp form, we are considered “individuals” still, rather than businesses because of the use of the 1040. So, if you ever have the unfortunate need to call the IRS, preface your question with “for my 1040” and then relay your related business-type question. Otherwise, the moment you say “Self-employed” or “sole proprietor”, you will be immediately bumped to the “Business” department and they won’t answer any question related to a 1040 in the business department.

I have now come to the belief that there is no improving of the IRS in anyway — with whatever corruption, malfeasance, or ineptitude present — because the sheer absolute bloat and inertia of this entity will prevent any effective change. It would need to just be completely dissolved and rebuilt from the ground up if its problems are to be fixed.

I opened a solo 401k in 2014 and I’m unclear as to how exactly to report my solo 401k employer contributions. I’m a sole proprietor and have not incorporated (I just applied for an EIN number so that I could open a solo 401k).

I’m a physician and have a main job in which I am classified as a K-1 partner and I use my personal SSN for this income. I maxed out the 401k contribution with this K-1 job.

For my 2nd job which started in 2014, I am an independent contractor. I opened a solo 401k so that I could contribute ~20% of income from this 2nd job to a solo-401k plan as “employer contributions.” Initially when I started this job, I just used my SSN for the 1099-MISC as I hadn’t acquired an EIN yet. My SSN (which, in a unrelated issue, is also listed incorrectly on the1099-MISC form) is still listed on the 2014 1099 MISC. I notified the payroll account that I now have a EIN. He stated that he can’t change anything for the 2014 tax year but will make note of that for 2015.

So I’m now doing turbo tax and am wondering when I need to use the EIN vs SSN.

Also, when I mail the solo-401k contribution checks to my solo-401k holder (TD Ameritrade), I’m unclear as to if I need to indicate just my EIN number or my SSN (or both?) on the deposit slip. TD Ameritrade actually uses an IRA deposit slip and I write over the “type of contribution” that it’s for a solo-401k and not a SEP Employer contribution or other contribution, but there is only space to write in a SNN, not an EIN.

I am in a similar situation. I don’t put the EIN on my tax return. I don’t fill out a slip for my solo 401(k) but Vanguard knows my EIN already. Pay the taxes you owe and I doubt you’ll have any issues with the IRS.

Ok, I figured it out. On TurboTax I listed my independent contracting business in a completely separate section (and an EIN was asked for) from my K-1 partnership business. Both areas allowed for itemized deductions separately and adequately.

The contributions for both the solo 401k and the K-1 partner 401k are listed in a section together where one can specify amounts for employer vs employee contributions, and later there is a question asking how much was attributable to each. I also have a defined benefit plan and figured out how to include it as well (under the Keogh heading, although it’s technically a cash balance DB plan), so I think I got credit for all of my retirement deductions.

It’s taken me a few years to figure these things out on TurboTax. Wish it was more straight forward, but Turbotax hasn’t made certain steps too user friendly yet. I also used a walk-thru guide from the Finance Buff’s webpage (with screen captures) that helped greatly with entering the backdoor Roth correctly.

Kon,
Thanks for your reply. It seems a lot of people are confused about this–so you are saying 18K in 457 and up to 53K in solo 401K===so total of 71K in 2015?
thanks and I enjoyed your talks on quantiamd

Glad you liked it! It seems that the 403(b) rule is indeed not something that is commonly known (though employers are supposed to provide this information to the employees, and some do, from what I hear). WCI is right about the 403(b), though increasingly some providers choose 401(k) instead of 403(b). However, even if you have a 403(b) available, you do not have to participate in the 403(b), as most don’t even have a match. So it makes more sense to max out the solo 401k opened at Vanguard or Schwab.

For 2018 I’ll contribute $18500 to a 403b and I’ll get ~$21500 employer match in the 403b. I also have a 457b, but from the comments above it is clear that my contributions to the 457b don’t count towards the 415c limit of $55000 for 2018. My 403b employee and employer contributions of ~$40000 get me $15000 shy of the 415c limits.

I do have some 1099 income and have set up a solo 401k previously. Based on rule #7 in the post and comments 35 – 37 it is clear that I can’t use the employee contribution to a solo 401k since I used that up with my 403b employee contribution. I think my solo 401k employer contribution counts towards the same $55000 415c limit that is already $40000 used up from the 403b. Is that correct or is there a totally separate $55000 limit for the solo 401k given that I’m using a 403b? The plan administration for the 403b seems to feel the solo 401k is irrevalent from the standpoint of the 403b. However based on this post and the comments it seems that the combo of the solo 401k and 403b matter at least in terms of not being able to have two different employee contributions like I could if I had a 401k at my main job rather than a 403b and since that is the case, I assume I have to count the solo 401k employer contributions towards the 415c limit for my 403b.

I also moonlight and make around 40K a year. I open an Individual 401(k), but can only contribute the (self)-employer portion of 25% of the 40k to this account, since I have already max out the 18k contribution to my regular work place Roth 401(k)? Or can I still contribute the employee’s 18k to this Individual 401(k) account, for a total of 18k a year?

1. Unless you give yourself a W2, it is 20% of your SE income, not 25%
2. Unless your W2 401k has low cost index funds, I wouldn’t max that out. Instead, you can contribute just enough to get the match (if any), and put the rest of the $18k (yes, the total between the two has to be $18k) into your solo 401k plan.

Job #1) W2 employee(Anesthesiologist) with 401k 100% match up to 6% of salary. I also have a 403b account with this job and contributions over $15,900 get kicked over to this account via some rule in the plan. I am currently contributing 18k a year to this plan.

Job#2) Will be starting a job in Jan 2016 as medical director of plasma center as 1099 employee and gross salary of 36k/year.

Job#3) Additionally I will be doing some independent contractor work at another hospital unrelated to my 1st job making about 14-20k/year gross.

Am I right in that I can open solo 401k plan for both jobs #2 and #3? I am thinking I could open a solo 401k plan for job #2 and contribute 20% of profits to make it 7.2k/year and separate solo 401k plan for job #3 to contribute 2.8 -4k/year? Do you see any other potential ways of saving for retirement besides the roth IRA which I will do and HSA that I don’t qualify for? Thanks so much for your blog and love reading it.

I suggest you look at your retirement accounts for Job # 1 more closely. It is very odd to have both a 401(k) and a 403(b) for the same job. Are you sure it isn’t a 403(b)/457(b) combination?

There is no such thing as a 1099 employee. If you are paid on a 1099, you are not an employee.

Since you are the only owner of your two businesses (#2 and #3) you only get one contribution limit for them. That’s fine since you don’t have enough income to max out an individual 401(k) anyway.

Yes, you can open a Solo 401(k) for jobs #2 and 3. If your employee contribution is used at Job # 1, and it probably is, your contribution to your solo 401(k), all employer, would be around $10-11K.

I guess you could look into a personal defined benefit plan, but I don’t think I’d bother. I’d probably just max out whatever you can at Job # 1, do backdoor Roth IRAs, do the solo 401(k), and if you want to save more for retirement, do it in a taxable account.

Thanks for all the information. Between WCI and Bogleheads, I am finally getting a handle on my scattershot investment methology. But I was hoping for a some help and quick clarification that seems to be touched on in a few recent comments.

My situation – I am 42 and had been a private practice radiologist for 10 years then our hospital closed early 2014. Had always been on a W2 and had a group retirement plan with the max contribution 53K per year, and had no other income source, so it was pretty simple. Unfortunately had to roll that plan to a traditional IRA – so no more back door roth for me 🙁

But now…

1.) Employed radiologist at a local independent hospital since March 2015 – have both a 403(b) and 457(b) plan to which I will contribute 18K to each account this year (will get a match next year). So total there is 36K

2.) Also 1099 income from teleradiology which I did full-time for a about a year in between regular jobs – will likely have a $175K gross this year (was full-time in Jan and Feb 2015 then part-time), more likely 100K-ish in 2016 and going forward. So my two questions…

First question – (in two parts) – I opened an SEP-IRA for my 1099 income last year because I dragged my feet and missed the Dec 31st date for the solo 401(k). Can I open a solo 401(k) this year for my independent contractor job – as in does it matter that the same job has the two different accounts open? And if I can open the 401(k), would I just leave the SEP-IRA there for now or would I roll it to my traditional IRA?

Second, and bigger question – Would the solo 401(k) (or SEP-IRA even) contribution be limited to 17K for the “max overall contribution” of $53K that I always read about, or are the plans technically separate, and I can exceed the $53K “limit”, maxing out the solo 401(k) based on income factors, etc… It seems some post above says you can go over the magical $53K.

And I am not talking about the regular IRA yearly $11 for myself and my spouse, which we always do anyway.

However, your solo 401k and 403(b) total contribution will be limited to $53k, but this might not be a big deal for you given that with $100k you can’t max it out anyway. Going forward you’ll need to figure out where to contribute your salary deferral. If there is no match in a 403(b), I’d put the salary deferral into your solo 401k if your 403(b) investments are too expensive and there are few if any low cost index funds.

You definitely should open an individual 401(k). You definitely should roll as much tax-deferred IRA and SEP-IRA as possible into it and try to isolate any basis for non-deductible IRA money, then convert that. Then do backdoor Roths going forward. You definitely should get any 403(b) match possible. Then be sure to get the total $53K into the individual 401(k) + 403(b). (Unfortunately, as noted in the post, 403(b)s are a little different from 401(k)s in this respect). If you can still save more, use the 457.

Yes, you can have a SEP-IRA and a 401(k), but I don’t think you can contribute to both in the same year. And there’s no reason to have both. Just roll the SEP money into the individual 401(k). But get on it. It takes a few weeks. Make sure the individual 401(k) accepts IRA transfers/rollovers.

Thanks. WCI – I may have written the post above while you were responding to me. So if you could comment there, I would appreciate it. It sounds like the 457 plan can be above and beyond the 53K total for 403(b) and the 401(k)

So if I understand your last post – I can roll my traditional IRA – now with a high six figure balance – into my new 401k, since that will allow me to once again take advantage of the backdoor Roth? Thanks – I didn;t know that was possible and my accountant never mentioned it when we last talked…

All of the money currently in my traditional IRA came from my old retirement plan rollover when my private practice group dissolved after the hospital closure. All other previous contributions from the that account had been back-doored already prior to 2015, if that make a difference…

I was reading more up on the solo 401k regarding my 1099 job and I’m getting confused about the contribution definition. I was under impression that I could contribute 20% of my compensation into a solo 401k. I will make about 36k gross and was thinking I could contribute 7.2k roughly to it. However, lot of my readings indicate that I can contribute 20% of net adjusted business profits which I don’t understand, any insight on how that impacts me? Additionally, I don’t need to open an LLC or S/C corporation to complete opening a solo 401k for my 1099 position right? Again, thanks for everything.

If you get a W2, it is 25% (and you can only do that if you pay yourself as an employee, via an entity such as an LLC taxed as S-corp). If you are a sole proprietor (or LLC taxed as sole proprietor) then it is 20%. Of course, 20% will be from your net business profit, which is your gross minus various deductions if any. No need for an entity to open a solo 401k, though I would get an LLC to protect your personal assets from liability (if allowed by your state).

What liability do you think the LLC is going to protect a doc from? It won’t protect them from malpractice as that is always personal, no matter the entity. so it’s business liability only, and most solo docs don’t have any of that.

You do not need an LLC or Corporation, but you do need an EIN, at least with Vanguard. If you have no other 401(k)/403(b) to which you have made the employee contribution, then with $36K of income you can make an $18K employee contribution plus ~$7K employer contribution. It works out to be about 18-19% of gross. The reason it isn’t 20% is that it is 20% of “net adjusted business profits” (meaning profits after payroll taxes) not 20% of gross. If you have already used your $18K employee contribution elsewhere, then it’s just the employer contribution.

My husband and I are both physicians. His work offers a profit sharing 401K plan and defined benefits plan, which we plan to maximize (up to 83K total). I do part-time group practice and am an independent contractor. I plan to open a solo 401K and maximize then do personal and spousal backdoor Roth conversions. I am confused as to whether the money we put into these tax deferred accounts actually lower our taxable income since we are high income earners? Or is it considered a non-deductible retirement account? And how exactly is the backdoor Roth advantageous since we would be paying close to 40% on the funds we convert from our traditional 401K? Btw, have learned so much from this site and TIA!

Yes, these are tax deductible, that’s the idea. Your tax liability is definitely lowered by the amount you contribute.

The idea behind Roth contribution is that you want to diversify your future tax liability. If all you have are tax-deferred accounts, eventually you will need to pay Required Minimum Distribution (starting at age 70). This can potentially be a large amount, and you’ll pay taxes on this distribution whether you use the money or not.

Ideally, you want to have as much of your assets in Roth accounts as possible, however, given your high tax bracket it would be advantageous to have tax-deferred assets as well as Roth and after-tax. The Roth component might be small in the beginning, but later on when you are retired (or not working as much), you might consider converting some of the tax-deferred assets to Roth. You should also not neglect after-tax assets, because you will want to pay any taxes on Roth conversions using after-tax money.

Yes, the money you put into his 401(k), your individual 401(k), and his defined benefits plan all reduce your taxable income and thus your taxes. The money that goes into a non-deductible IRA and is then converted without any additional tax does not reduce your taxable income this year. It’s still a good idea because the earnings on the money in the Roth IRA will never be taxed. If you choose to convert pre-tax money to a Roth IRA, rather than non-deductible money to a Roth IRA, there is a tax cost to that. So it isn’t generally a good idea during your peak earnings years.

regarding solo 401k contributions. My wife puts in the max employer contriubtion (18k) at her full time job. she is also self employed (IC) making approximately 15k this year. when calculating the amount she can contribute to the solo 401k, I understand it is 20% of ‘net profit.’ I am trying to clarify what net profit means. Is this the amount she makes after subtracting off business expenses (ie computers etc) and SE taxes? Or is it based on the total income – SE taxes?

which example would be correct:
A) 15k profit. SE tax would be 2,119. Therefore 20% income would be based on 12,881 and could put 2576 into solo 401k

B) 15k profit SE tax 2,119. Business deductions, for example, of 5k.
12,881-5k = 7881. 20% of ‘net profit’ of 7881 would then be 1576

Thank you for the great article. I was hoping you can give me some advice on my situation. I am two years out of school and am the sole owner of a dental practice. My wife has an administration job at the local university and has a 403b but is also being paid through my practice for website and marketing management. At her administration job, she has a 200% match of 3% of her salary. The first year of practice, we max out my simple IRA, my wifes 403b, and did Roth IRA’s for my self and my wife. I am not planning on doing a Roth IRA next year due to our tax rate and large student loans. I am looking to move to a 401k with profit sharing next year in my practice. Is there any way to set up a 401k for my wife at my office and have her total contributions between the 401k and 403b be greater than 18k without her emplyeer contributions? If you see a better way to structure our retirement that advice is also much appreciated. Thanks!

First, I don’t like SIMPLE IRAs due to their effect on the backdoor Roth. So I think your move away from that is good, although if you have employees at your dental practice you probably need professional advice on this topic to see what the best option is for you.

Second, yes, she gets an $18K employee contribution, plus the match at the regular job. She can get an employer contribution at your practice equivalent to almost 20% of what she makes there. But be aware there are rules regarding how much you have to give the other employees.

You can also make Roth contributions to your 401k (or do in-plan Roth conversions). I would still consider doing backdoor Roth contributions. However, the question of whether you should have a 401k or a SIMPLE is not that simple. I’ve written an article for the last Dentaltown Magazine issue specifically to address this important point:

As WCI says, it all comes down to your practice demographics, so before you consider doing a 401k with profit sharing, you’ll need someone to do a thorough analysis of your personal/business finances to make sure that it would be an appropriate plan for you given what you are trying to accomplish. Part of that analysis would be a comprehensive design study to make sure that your practice demographics allows you to have a plan that is cost-effective for you and where your employer contribution to the employees is reasonable and manageable going forward.

I would also consider NOT doing 403b salary deferral contributions into your wife’s plan if the investment choices there are not very good vs. doing it into your plan instead (and contributing only enough to get a match, if any, into her 403b plan).

I have read through ALL of the comments on multiple posts and cannot find any situations that are similar enough to mine; thus, I am in need of your expert advice.

I was working as a W-2 employee anesthesiologist up until October 1 of this year. That employer made 3 quarterly contributions ($13,250 for $53K IRS max) for 2015 in a Fidelity non-prototype “pension” plan. It required no contributions on my part, so I made NO employee contributions to the plan.

I got married in October of this year. I turned 36 earlier this year.

Starting on November 15, I started a new job with a group that required me to set up a PA (professional association) that will file with the IRS as an S-corp. They also recommended that I set up a solo 401k plan (and not SEP)–which benefits me because I do a backdoor Roth every year (and it’s my understanding that SEP’s can interfere with this). The group pays my PA $335k/year for contractor “salary”. I then will pay myself W-2 wages from this PA that I own. They recommended to me to pay half of the $335k as W-2 wages ($167,500) and then keep the other half in the PA (to keep the IRS happy). From the other half that remains in my PA, I would pay expenses (computer, cell phone, internet, CME, car mileage, work entertainment/meals, etc), health/dental insurance, malpractice insurance, and solo 401k funding–all pre-tax. Whatever is left over in the PA after all of that, I would take as a K-1 distribution (thus saving me the self employment taxes on that portion). They have instructed me to withhold at a higher rate on my W-2 wage payments to account for federal withholding that will be paid on the K-1 earnings.

I have the following questions:
1. Does splitting the $335k into 50% wages and 50% PA/expenses/K-1 make sense? E.g. Would it avoid ire from the IRS? Should I consider a different breakdown–more in wages/less in PA or less in wages/more in PA?
2. Since I have made no employee contributions to a retirement plan in 2015, would I be able to have withheld from my W-2 wages for 2015 some or all of the 18k IRS max for employee contributions? If so, what would be the most I could contribute for the 1.5 months of wages I will receive for 2015? Would changing the breakdown of wages vs. PA FOR 2015 make sense to max out retirement for 2015 taxes, given that employee contributions have to be made before 12/31/15 (and then potentially changing the amount of W-2 wages for 2016 if necessary)?
3. How much could I contribute from the PA for the “employer” contribution for 2015, given the fact that I have until the PA taxes are filed in 2016 to make “employer” contributions for 2015? According to what I have read so far, the $39,750 (75% of 53k IRS max for 3 quarters of employment) that my previous employer contributed to my previous “pension” plan should not affect the separate $53k max that I can contribute from my PA as the “employer” contribution for 2015? Would the amount I can contribute for 2015 be 25% (because of S-corp status) of W-2 wages pre-tax or net/after tax?
4. For 2016 (and I guess for 2015 also), how much W-2 wages would I have to be paid from the PA in order to maximize both the EMPLOYEE and EMPLOYER contributions to the solo 401k?
5. When setting up the solo 401k, would it matter if I used TD Ameritrade or Etrade? My plan is to just invest in no commission ETF’s. Would there be any way to include my spouse somehow in the solo 401k (since she is 50% owner of my PA–see #7 below)? Does the plan need to be covered under ERISA?
6. As mentioned, I have the pension from my previous employer that has about $105k (pre-tax EMPLOYER contributions). I also have an old 401k from a previous job that has about $45k from years ago (pre-tax employee/employer contributions). Should both of these be rolled over directly into the new solo 401k that I will be setting up? Would there be any advantage in rolling these into a different type of account (IRA/SEP) before ultimately rolling them into the 401k (keeping in mind that I still want to retain the ability to do a backdoor Roth)? Would there be any advantage for me to start a defined benefit plan instead of a solo 401k in order to defer taxes on larger amounts of money?
7. With my new marital status, are there any ways that I can defer further taxes with my new “married” status (other than possibly starting to fund a backdoor Roth for my wife)? My wife is finishing nurse practitioner school but for a few different reasons, she may not be practicing when she gets done. Thus, she is not employed. However, because of Texas laws, she is 50% owner in the PA with me; she owns 50% of the PA/S-corp, and I own 50% (according to how the PA/S-corp was required to be set up). Are there any opportunities to take advantage of for retirement/deferring taxes by having her as 50% owner of the PA/corporation? Am I missing any other spouse opportunities for tax savings? Any advantages to finding a way make my spouse an employee of the PA?
8. I also contribute the IRS max every year to an HSA account. Am I myself missing any other opportunities for tax savings?

I realize have asked SO MANY questions, but I am grasping at straws at this point because every expert I have consulted has little to no knowledge regarding my particular situation (or regarding professional associations in general). If any of the above questions are hard to understand, I am happy to provide clarification.

Thank you SO MUCH in advance for any help/advice you can provide. I am forever grateful.

1. Seems reasonable. The more you claim as distribution the more you save in taxes. The less you claim the less likely the IRS is to disagree with you. The 50% rule is good.You want the salary to be high enough to max out retirement plans because you can’t put distributions in there.
2. $18K. + 20% of net salary (net of SE taxes)
3. The 20%/25% number is basically the same number as the 25% doesn’t count what you put in and the 20% does. Sorry they make it so confusing. It’s net of SE tax, not income tax. But if your salary is more than 50% for the rest of 2015, you could put more in there for this year. Don’t know if you can afford to do that though.
4. $35K*5= $165K. Add a little more to make up for the SE tax. Maybe $175-180K or so. Takes less money to max out a 401(k) than a SEP-IRA.
5. There are subtle differences, but both are probably fine. I’ll leave the ERISA question to Kon. It’s not clear to me why your wife would be 50% owner. That seems a little squirrelly. I’ll leave that one for Kon too.
6. I’d roll them into the individual 401(k) (assuming the pension is eligible, which it probably is.) No advantage to stopping in a SEP-IRA that I can think of. I would only stop in a traditional IRA if it was somehow required and I don’t see why it would be. I would not use a DBP instead of an individual 401(k). I’d use it in addition if I were going to use it at all.
7. The problem with being an owner is that money can’t go into retirement plans, which is the biggest tax savings. She would have to be paid a salary to do that. I’ll try to think if there is some other tax-saving opportunity there but I can’t think of one right now.
8. Personal DBP would defer a lot of taxes. Obviously being married, especially to a non-working spouse, saves you tons because you now use the married tax brackets. Plus if you don’t make too much, you get another exemption. Plus the standard deduction is larger. Those are the main benefits.

Lots of good questions. This is basically an entire ‘case study’ from start to finish. What entity should one set up? What salary is reasonable? Should spouse be a part owner or and/or an employee? How much should the spouse be paid? Where is it better to open a solo 401k plan? Should you roll over your old SEP/401k accounts into the new plan? Should you add a Defined Benefit plan to your solo 401k? At what age would that make sense? All great questions – the answers will depend on specific individual situation.

I imagine the 50% ownership of wife is a Texas (community property) rule. There are 7 states that are community property states. WCI readers would probably do well to consult with an estate planning attorney in those states to make sure they fully grasp these rules. Some are beneficial (asset protection) and some are not.

As far as saving on the SE tax, remember that you are only saving on the SS portion of that tax when your W2 wages are over the wage base. In essence, every dollar of SCORP distribution (as opposed to W2 wage) over the SS wage base is saving 3.9%, not the full 15.3% SE tax. So if you need to claim a higher W2 wage it doesn’t hurt as much tax wise.

If you pay your a salary then you will end up paying the full 15.3% SE tax on her wages, including federal income taxes too. As an employee she would pay 7.65% and your business would pay the other half. She could then defer her 18k into the plan and you can added profit sharing into her account as well. Is it worth? Probably, but the 15.3% SE tax makes the comparison less favorable in my opinion.

Hi guys,
So I’ve read this blog quite a bit and still a bit confused, probably because everybody has different scenarios. Anyways, wanted to make sure I was correct. So I was employed with Hospital A from Jan 1 to June 30 as a W2 employee with the option of 401k (unfortunately did not make any contributions), then July 1st to Dec 31st I am employed with Hospital B with the option of 403(b) (I made $18k contributions), also from Jan 1-Dec 31st I have a 1099 from Hospital C (Not sure how much I can contribute here and to SEP or solo401k — thinking 20% of my gross profit to max of $53k). Please let me know if I am right or what I should do…Thanks guys!

Yes, sounds right. 20% of 1099 income net of SE taxes into a SEP or individual 401(k) (since you used your employee contribution at hospital B 403(b). I recommend the 401(k) to preserve the backdoor Roth option.

If you have a 403(b), your TOTAL contribution to that and a solo 401k can be no more than $53k, unfortunately. If you had a 401k for the W2 job, you could have $18k + match AND another $53k via profit sharing.

Very interesting article and very helpful. I have a couple of question for WCI
1. Could you use a Mega back door Roth in an individual 401 K plan to get to the maximum 53K. Hypothetical situation of a doctor who has W2 income of 350K and maxes out the hospital 401 K employee deferral of 18K. He has a 1099 locum job that brings in an additional 60K. He puts 12K (20% of 60K employer contribution) into the individual 401K plan. Could he then put an extra 41K as an after tax Mega back door Roth into the individual 401K retirement account.
2. Does the IRS permit putting extra 18K as employee contribution to the individual 401 K or is this a gray area open to interpretation?

1. No. I don’t know of an easily available 401(k) that allows the Mega Backdoor Roth option. But if the plan allowed it, I don’t see why you couldn’t do it. You might even be able to have a custom-designed individual 401(k) that specifically allowed that. Great thought. Other good resources on that topic include Kon Litovsky, who helps design custom 401(k)s at Vanguard, and The Finance Buff blog, who has written all kinds of good stuff about the Mega Backdoor Roth.

2. You only get one $18K employee contribution, no matter how many 401(k)s you have. So if you used it up at your W-2 job, you can’t use it again in your individual 401(k). Not gray.

Right, as WCI said, it is possible to convert your plan assets to Roth inside the solo 401k plan with a custom plan document, but unless you have a big balance in the plan and/or you are making large contributions, I wouldn’t bother with that. I would suggest making your salary deferrals into your solo 401k plan instead as I’m sure your investments will be lower cost and better quality at the likes of Vanguard, Fidelity and Schwab and you can do Roth salary deferrals ($18k a year), and backdoor Roth ($5,500 per spouse), and this will probably be enough. If you really wanted to do mega backdoor Roth, you might be able to roll your solo 401k contributions periodically and convert them to Roth outside of the solo 401k plan, which is also an option (though not sure if all solo 401k plan providers allow for this, and it might also have to be added to the custom plan document, in which case you might as well get one that allows in-plan Roth conversions).

They’re talking about a Mega Backdoor Roth- so the custom plan document would have to allow both after-tax contributions beyond the employee contribution and employer conribution and in-plan conversions. Can you design an individual 401(k) that allows that? Basically, it would allow someone with a $60K 1099 income to put $53K of it into an individual Roth 401(k).

YES! In fact, with in-plan Roth conversions, you no longer have to take the money out, and you can convert after-tax contribution to Roth inside your plan. Not bad! This probably makes a custom plan document definitely worth it now regardless of where the solo 401k plan is.

I’ve asked the TPA to give me a set of rules on what exactly can be done, as much of this is relatively new so there isn’t as much written about it yet.

Thank you WCI and Kon Litovsky. It would be great if one could put after tax dollars into an individual 401K plan and have an in-plan conversion. That would definitely make it worthwhile for the extra Roth space. Does this require a special set up for the individual 401K plan?

WCI
You only get one $18K employee contribution, no matter how many 401(k)s you have. So if you used it up at your W-2 job, you can’t use it again in your individual 401(k). Not gray
You had mentioned that you contribute 18K employee contribution to both your 401Ks or did I misunderstand you . “Whether you can do the $18K employee contribution into that too is a bit grey. I do, but I can understand why others would not feel comfortable doing so.”
How are you able to overcome this in your situation
Thanks

Yes, it is possible to do that with a custom plan document. You’ll need to find a Third Party Administrator who’d be willing to do that for you. Also, once you get a custom plan document, most TPAs will charge you a fee for administering the plan and tracking all of your conversions and contributions, which can get costly for a small plan like a solo 401k.

Another related question with the individual 401 k. If on a given year you don’t have any 1099 money (no locums that year) could you still do the mega back door Roth that year by putting 53k of after tax dollars and converting it to a Roth.
What would stop you from contributing 53K every year to Mega back door Roth once you have an individual 401 k plan set up to accept in plan conversion.

This would be a huge deal if allowed. I haven’t seen any options on the Solo 401ks I set up to allow for after tax contributions with in plan conversions. This would be news to me and would like to know which plan/custodian/TPA that would allow that. I would certainly do it for my plan and slowly chip away at our taxable accounts and turn them into Roth money.

WCI, thank you for the interesting topic. I work primarily as an employed ER physician in one state but do locums work in another state. For 2015 I have made 300+ at my primary job and 72k at my locums position. If I understand correctly, I can put 18% of this locums money into a solo 401k? I have already contributed the maximum of 53k into my employer and employee contribution at my primary practice so this locums money that I will contribute (about 13k) will be considered an employer contribution at another independent job. Please feel free to correct me if I have misunderstood anything about this process and again thank you for all you do.

After reading this entire comment section, I thought I had this figured out, but now I am slightly confused. I am not a white coat and my current income doesn’t come close to what you guys get, however, I have income from three separate businesses and would like to figure out the most advantageous way of filling a solo 401k or 3, so hopefully you can give me some feedback.

Bus A – I have my own business of which I am a 100% owner (currently a corporation that will be dissolved at the end of 2015) I would like to put as much of this income as possible into a solo 401k (it’s not much and would not max it). (I have been trying to understand the controlled group rules and may possibly fit under the brother-sister group, but am not sure of that, since I am 100% owner of one business and 50% of the other. These businesses are completely unrelated and have no interaction with each other. Do I have to get a ruling from the IRS?)

Bus B – My partner (SO – not married) and I also have a 50/50 partnership business. We opened a solo 401k on this last year and put all of the net profits into it as an employer contribution. (very small amount)

Bus C – In addition, my SO is an IC for another completely unrelated company and has 1099 income. I work part-time for him in this business and he gives me a 1099 as a sub-contractor. I had not considered using any of this income to fill a retirement account, but am now wondering if I should or if it’s possible? Would that be a 3rd 401k ?

We are also over 50 so the catch up amounts apply.

If I use Bus. A to fill the employee portion up to 24k; then would I take 20% of net profits of A, then B, then C assuming I would still be under the 59k max ? And after I dissolve to s-corp how would all that change?

One solo 401k would be fine. If I am making an employer contribution, the money has to be sent directly from each business which have separate EIN’s – do I add on to the plan documents? – I just want to make sure that is the legal way to do it. And yes, it would be short to get another one opened before the end of the year. Thanks.

Sorry, missed this one. You can have a multiple employer plan (definitely need a custom plan document). This is in case more than one employer participates in the plan. If you get multiple 1099s, you can have them all go to a single entity. This is very much doable.

I also have couple of partnerships which would qualify as related businesses for the purpose of retirement plans. They don’t make a whole lot so I would like to setup a solo 401K with both contributing to it within one limit.

I also have couple of partnerships which would qualify as related businesses for the purpose of retirement plans. They don’t make a whole lot so I would like to setup a solo 401K with both contributing to it within one limit.

Also, does anybody know if same type of sharing can be done for cash benefit plan?

Multiple employer plan might work here. I don’t see this much, though in CA and other community property states husband and wife with two separate practices would need a single plan if one of them has employees, so in that case you can have a two-employer plan. I believe this is as simple as drafting an appropriate plan document.

Sorry for the confusion, I was not using the terminology correctly. Yes, there are multi-employer and MEP plans. This is neither. I think that this is just a matter of adding all of the controlled/affiliated entities to the plan document and naming the plan accordingly. I don’t believe there is a name for this because it is not an MEP (unrelated employers). It is a plan for a SINGLE employer (after all, that’s what affiliated/controlled groups amount to – having one single entity under common control that employs everyone). The TPA should know how to handle this, that’s all. Failure to include other entities (esp. with employees) can cause big problems, so it is always a good idea to identify all of the entities that form a single employer for the purpose of retirement plan testing.

I believe you’d be able to do $1800 into the job 1 401(k), possibly as much as $53K into the Job 2 401(k) (assuming you’re a W-2 employee there) but no more than $16,200 as an employee contribution and ~ $5K (20% of self-employment earnings net of self-employment tax) into the Job 3 individual 401(k).

Thanks for the great summary and discussion. Because this topic isn’t convoluted enough, i decided to add another layer of complexity. As you have discussed elsewhere, the IRS has now formalized policy about rollovers of AFTER-TAX contributions to 401k plans. My question is this: I have two 401k plans (employer and solo 401k, and both plan documents allow for AFTER TAX conributions and in service rollovers. I’m 55 years old. What would the maximum total AFTER TAX contributions be that I could make, using both plans?
I have an inordinate imbalance in my savings with ~80% being tax deferred (IRA and 401K) and ~15% in tax advantaged accounts (Roth 401K, backdoor Roth IRA) and 5% in a nonqualified brokerage account.
Spoke with my CFP and he was unsure. Got the same response from my CPA!! (maybe I need to get different financial guys?!?!)

Yes, both of them should know this (or at least they should research it to find out – looks like they are taking you for granted). However, this is common – most CPAs and advisers are not experts in retirement plans unless they deal with these plans all the time.

So because you have two plans and two limits, you can contribute up to your plan limit, or $53k ($59k with catch-up). But you can only have one catch-up for both plans. And you can only have one salary deferral of $18k for both plans. So my take is that you can contribute $24k in Roth salary deferrals and $88k in after-tax contributions into both plans if your W2 plan allows this. You can then take after-tax contributions and convert to Roth by doing the following:
1) Move it to a Roth IRA (from your W2 plan), if it allows outgoing rollovers of after-tax assets.
2) Convert the solo 401k after-tax contribution to Roth inside the plan (this is not available yet in custom plan documents, but in couple of years it would most likely be – right now, only tax-deferred can be converted inside the plan, unless you get an ‘extra’-custom document). Otherwise, moving this money to a Roth IRA is an option.

Thank you so much for the thoughtful and speedy response! I asked the same question of my son (a CFP but we like to keep family and business separate). He got back to me this AM. He thought he knew the answer but wanted to confirm it by asking the local pension corp he uses. He came up with the exact same strategy/answer that you gave. Like you, he was not very impressed with my financial team. In fact, he said if either one doesn’t get back to me, I should consider a change as I’m not getting good value for my $$. He was more forgiving of the CPA than the CFP though.

I’ve been dealing with exactly the same problem: where to get the answers I needed quickly and accurately. So I just found myself a medical/dental CPA, an amazing TPA and an actuary, an ERISA attorney and an insurance broker, all of whom are some of the best in business (and who also happen to respond to inquiries very quickly). One person rarely knows everything as there are just too many different moving parts, so having a quality team is always best (and the best isn’t always in one’s back yard – my team is all over the country). In this complex area, getting the right answer is key, and things change all the time, so we always have to be on the lookout for the effect of these changes on your retirement plans.

The problem with your CFP might be that you are paying them via asset-based fees, rather than fee for service, so their job is to ‘manage your investments’, while everything else is rarely addressed or taken care of. Technically, CFPs are supposed to be planners, but in practice, once they get a taste of asset-based fees, everything goes right out of the window because asset-based fees create multiple conflicts of interest:

That’s why I always recommend working with advisers who are compensated via flat fees, and who not only have specialized knowledge needed by doctors and dentists (on topics like retirement plans), but who would also collaborate with your other advisers, and if your other advisers are not there, they should step in and provide leadership to take care of things that your other advisers have been ignoring.

I would appreciate your advice
here is my situation
I am an employed physician working for a hospital owned medical group.

I get paid by a W2. I have a 401 k and 457 plan at work to which I contribute the maximum (18k each) . There is 6% matching by employer for the 401k.

I also do some speaking for various pharmaceuticals and some online/phone surveys. These activities only provide small extra amount of income (about 10-11k last year) which is paid as independent contractor (1099). However a significant portion of that extra income goes into taxes as I am in the highest tax bracket. I was interested in finding out what options do I have in setting up any additional retirement plans so that I can contribute additional money pre tax.

Is it worth setting up a solo 401 k for my speaking fees and surveys?
I understand that I will need to pay employer portion of SS tax and medicare tax as well if set up a 401 k?

thanks for reply
I am trying to figure out how much i will save on taxes if i open sep IRA (its too late for 401 k for 2015)

if i contribute 20% of income to SEP- IRA, it will be $2,000 (total income of 10-11k). for Taxes that will save me about $792 (39.6% of 2,000 for ordinary income tax) plus $29 (1.45% of 2,000 for medicare tax) and $18 (0.9% of 2,000 for additional medicare tax). so total savings of $839.

but i will have to pay employer portion of SS tax on the $10,000 which will be $620 (6.2% of 10,000)plus medicare tax of $290 (2.9% of 10,000). so total tax will be $910.

so given these numbers do you still think its worth it?
Are the calculations correct or am i totally missing something?

I couldn’t really follow your calculations. You made it far more complicated than it needs to be. Here’s the way it works:

If you contribute $2,000 to a tax-deferred account, and your federal marginal tax rate is 39.6% and your state marginal tax rate is 5%, then your tax bill is reduced by

$2000* (39.6%+5%)= $892

Hope that helps.

You pay payroll taxes whether you spend the money or save the money. No difference. The only way to avoid them is to not earn the money in the first place. So no sense in bringing them into the calculation.

Hi WCI
thanks for clearing my confusion.
I don’t think I can contribute to solo 401 for 2015 now.
If I contribute to SEP IRA, I understand it would affect my backdoor roth IRA conversion.
I just made the roth conversion for 2015 for myself and my wife.
i believe i can roll over the SEP IRA to solo 401 k .
I can go ahead and open a solo 401 k for 2016.
when can i roll over the money from SEP IRA to solo 401k?
can i open SEP IRA for 2015 and solo 401 k for 2016 in the same year and the roll over the SEP IRA to solo 401 k in the same year?

If i am able to roll over within the same year then i can do my backdoor roth conversion for 2016 in early part of 2017

Yes, for 2015 you could do a SEP. Then open a solo 401(k) for 2016 and roll the SEP money in there-no waiting period required. You can then do your 2016 backdoor Roth (in 2016.)

JP |
February 23, 2016 at 11:43 pm MST

HI WCI
Thanks for your reply
can i open the SEP IRA and then solo 401 k at vanguard.
I remember reading somewhere that the vanguard solo 401 k does not accept roll overs?
I have my employer retirement account at fidelity but my personal roth IRA accounts at vanguard.
any suggestions if one is better than the other
thanks

1. does your 401k allow after-tax contributions? If it does, you might want to consider this option as it allows for Roth rollovers down the line.
2. assume you’re doing a back-door Roth already?
3. I believe you have to pay SS and Medicare on net self-employed income regardless of the retirement vehicle you choose.
4. That leaves you with an SEP-IRA vs a 401K for your 1099 employer contributions. I think it’s a toss up between the two in your case in that you’ve already maxed out your total allowed personal contribution (18K). Both allow 25% of W2 or 20% of self-employed income employer contributions. SEP-IRA setup paperwork might be a little less cumbersome . . .

how does the 401 k after tax contribution work? and how are you able to do roth conversions down the line.

my employer 401 k and 457 are with fidelity. is this something common for plans to have this option.
when I call fidelity about it what exactly should I ask them (they usually tend not to be very knowledgeable)

I have an employed physician job with a hospital (403+ 457 + match). I put in 18K to the 403, 18K into the 457 (I know it does not count towards the 53K limit) and the hospital puts in 21K as a match.

I also have an S Corp side practice. I made 45K in 2015 and am projected to make 90K for the S corp in 2016.
So if I opened a solo 401K, I would be able to put in employer contribution only right? Is this math correct?

90K x .25 = 22.5K into solo 401K for tax year 2016.

I missed the deadline to do the solo 401K for tax year 2015 and I would prefer not to create SEPIRA (because I already have a backdoor Roth from two years ago).

I have a full-time job as an employee where I receive all benefits (403 + 457 + match). I put in 18K + 18K and there is a 21K match.

I have two questions:

I have a side practice which is an S corp: I made about 45K in 2015 and will make more for the S corp in 2016.
So I would be able to contribute 25% of my earnings from the S corp for 2016 if I did a solo 401K right?

My next question is regarding opening of the solo 401K. I have three workers in my practice (two MAs and one echo tech). My acountant feels that the echo tech can be easily classified as an IC but not the MAs.All staff work less than 200 hours per year and are paid hourly. I’ve read some stuff on investopedia and the IRS regarding classifying workeds and it seems to be about how much control I have over them.
If it turns our that the MAs are part-time employees, would I still be eligibile to open a solo 401k?

While you can contribute 25% with a W2 into a solo 401k plan, your total contribution will be limited into a solo 401k PLUS a 403b plan to $53k. That’s just one more rule to worry about.

Unless you have all ICs, I don’t believe you would be able to have a solo 401k with any non-spouse W2 employees with the way solo 401k plan documents are written. For that you might have to get a custom plan document so that you can specifically exclude those W2 employees who work less than 1000 hours, and then you can simply pay all of your employees with a W2 (we don’t want you to break the law by paying some as ICs where that’s not warranted).

I agree. And remember the 25% rule is really 20% depending on how it is calculated. It is 25% if you don’t count the contribution as part of the total salary and 20% if you do, but really the same number. So if you make $100K and put in $20K, that $20 is 20% of the total and 25% of the total minus the contribution.

18K into 403B, 18K into 457B and (there is also a 21K match from employer which I do not count towards my retirement planning due to a complicated vesting structure).
I realize the IRS counts the match so my understanding is that the maximum I can have across all accounts (even with unrelated separate employers) is 53K. So 53K – 18K (from 403B) + 21K (match) = 14K that I can put into a S401k.

S Corp salary to me this year will be about 30K.

Deferred salary for my wife is going to be $7200.

So my understanding is we can put entire 7200 for my wife into a solo 401k under the S corp as an EMPLOYEE CONTRIBUTION.

I can get $6500 (25% of 30K) into an EMPLOYER contribution into a solo 401k under the S corp.

My questions are:
1. Are the deadlines for the EMPLOYEE and EMPLOYER contributions different? I was told Dec 31 for both by my accountant but Fidelity says it is 12/31/16 for my wife’s EMPLOYEE contribution and 3/15/2017 for EMPLOYER CONTRIBUTION for me (S corp filing deadline).

2. Is my wife eligible for EMPLOYER contribution of 25%? My understanding is no since she is setting aside 100% of her pay into the s401K and I don’t think the EMPLOYER and EMPLOYEE contribution can exceed 100% of one’s pay.

Your limit is 20% (actually slightly less) of $30K, so something around $6K. $6K + $18K + $21K is still under $53K so you’re good there.

1) You can certainly put in employer money after the 1st of the year, but I’d try to do it all by Dec 31st. I think the employee contribution needs to be in by Dec 31st. So I agree with Fidelity, not your accountant.
2) I don’t see why you can’t set up your wife’s employment agreement so she gets a match. I can’t recall reading a rule anywhere that says the employer and employee contribution cannot exceed 100% of pay. In reality, her pay is her salary plus her match. Now, money that goes toward her match cannot be used to calculate your maximum employer contribution of course.

Trying to figure this out for my brother (physician too). He works for a university and gets a W-2 and does the university 401a, 403b and 457b. He puts 18k of his salary in the 403b
He also moonlights part time for a completely unrelated VA hospital. However he receives a W-2 from them. Since the VA work is fees based he does not qualify for any retirement benefits at VA.
My question is can he open up a solo 401K for his W-2 income from the VA hospital (roughly around 100K) and if he can how much is he allowed to put in.

My question is about IRS rules regarding affiliated service group. I think in your Example #4, physician violates this rule. He is a partner in office practice and also consults on the side. He has 2 separate corporations and 2 different 401Ks:

However he provides relatively similar medical service for both. Isn’t it a violation of IRS rules regarding affiliated service group and indeed both retirement plans in these companies have to be identical?

I had this issue come up during discussion with my CPA when I suggested that besides my medical outpt practice (6 partners, 16% ownership) I set up a consulting solo corp on the side for the on call work (1099) I do for a local hospital. My CPA said solo corp has to have identical 401K as my medical group practice because of affiliated service group rules. Even though hospital follow up patients comprise ~1% or less of my outpatient practice and inpatient work is substantially different – different types of patient problems, different acuity and some procedures not done as outpt. I am a GI doc btw.

Just because a doctor does two jobs within their specialty, one for his group practice and one for a hospital does NOT make this into an affiliated group just because they do the same tasks for both jobs. If the doctor uses his practice facilities to earn 1099 income in addition to practice income (or uses practice employees), that’s an indication that this might be an affiliated group.

In your case, I do not believe this is an affiliated group unless there are other facts not presented here. Do you have a separate S-corp for each partner in the practice? Does your practice operate out of the hospital facilities?

My outpatient medical group practice is S corp, owned equally by 6 of us. We also use outpatient surgical center which is another S corp and also owned by 6 of us. Less then 1% of our outpatient business ends up being done in hospital, and less than 1% of hospital on call patients come back to the office of on call doctor. Doctors don’t own other individual medical S corps. 5 of us take call at the local hospital who pays 1099 income (based on set fee per call night) – it is currently paid once monthly to the medical group. My plan is to form a solo corp and either carve out hospital on call compensation from group and transfer it to solo corp or directly approach hospital and have it send 1099 to my solo corp.

My CPA proposed to write IRS (determination letter) to have them rule on my situation, then set up solo corp and 401k if IRS gives green light. He pegged the cost of the letter at $4500 to IRS and $5-10,000 for his service. Ouch!

You do want an opinion letter from someone – this is a complex situation, but it is not necessary to do what your CPA proposes. Please get in touch with me ([email protected]) and I’ll refer you to my ERISA attorney. For a fraction of that he’ll come up with an opinion letter you can take to the IRS if they ever ask questions. This is ERISA law, and I’m not sure IRS will be able to give you an answer in a timely and cost-effective fashion because this would require someone asking the right questions. IRS by the way might charge as much as $10k for a private letter ruling (which it sounds like this might be).

I am finishing residency and have accepted an independent contractor position in emergency medicine. I also plan on doing some locums work. My wife is currently unemployed. If I set up a solo-401K at my main job (independent contractor), can I also use separate locums income to set-up another retirement account? I also plan on maxing out backdoor Roths and HSAs for me and my spouse.

Sounds to me like those two companies would be related, so one $53K limit between the two of them. If you are an employee with the locums work, then you may be eligible for any 401(k) they may offer. But that would be unusual.

I wanted to know, if I can open 2 solo 401k for my own company. so that I can split the amount between two company accounts for example(Etrade and schwab).
I waated to do this so that I can withdraw as a loan $50k each from 2 accounts.
Let me know if that is possible.

I don’t think you can open two in the same year (not 100% sure though), but I suppose you could open and fund one this year and then open and fund another next year. Pretty unusual situation. If you really need the money as a loan, why not just skip the contribution in the first place? Are you just trying to “save” tax-advantaged space for later while getting the deduction now?

yes you are correct. Wanted to save on tax deferred space and get loan from 2 accounts so it would be 100k.
Suppose I have 200k in one account I can get a loan 50k. if I have 2 accounts(100k in each)) then I can get 50×2=100k loan.

You don’t have two unrelated employers, you have just a single employer who employs you, so the previous plan is terminated and a new plan is installed with the same limit, unless you happen to work for two companies simultaneously and have access to two different plans.

That’s a heck of a good question that will require somebody smarter than me to give a definitive answer. Bear in mind that the plan rules are probably going to dictate what you can actually do, so go read those and see what HR will let you do. You certainly can’t do two employee contributions anyway and chances are without that you won’t get much of a match.

Thanks for the reply. I am one of the owners of the company being acquired, so I could theoretically make a $53k employer contribution before the acquisition closes while it is a separate entity and then do employee contributions (plus any match they have) in the acquirer plan once I am an employee of the new entity. If it’s legal that is. 🙂

Actually, the buying company most likely has very specific rules in place regarding things like that. This is not just about IRS disagreeing. When they disagree, the plan sponsor tends to be on the hook for some hefty penalties, so I would not suggest breaking any rules without consulting with someone (this might require taking a look at both of the plan documents and/or specific conditions of the purchase).

I’m a partner in a 7-partner urology practice s-corp (~380k W2) and max out 401k at $53k. I have back-door Roths for myself and my wife as well as an HSA, all of which I max out. The 401k is crummy, with high-fees and bad investment options. I’m working on getting the practice to switch, but as a junior partner, it’s been an uphill battle so far.

I also make about $30k/year on a 1099 for on-call income from local hospitals. Could I set up an individual 401k? If so, how much could/should I contribute? Would it be possible to roll my practice 401k into my individual 401k?

Here’s the short of it. We get approached by group practices with the type of plan that yours has. The biggest problem they have is not the high fees, which simply hit them where it hurts as far as returns. This is an individual/personal problem (which should be addressed, because over decades it can amount to hundreds of thousands and even millions in extra fees spent on nothing). There are other problems your partners should worry about. For example, such plans are often mismanaged, and have lots of administrative and compliance problems. This would potentially cause big penalties in case of an IRS audit (which happen a lot more with retirement plans than people realize, especially when there are red flags and there is nobody in charge). So, the first thing I would recommend is to have your plan reviewed across the board, starting with admin/compliance, as well as everything else including cost. It might be the case that the plan has been sold by a broker who is a relative of one of the owners (or an adviser for one of the owners – that’s another variant that’s more common – this creates problems especially if the partner gets any benefit out of this arrangement, such as a lower fee breakpoint). If you have any non-partner employees, there are also significant fiduciary concerns that have to be addressed. This does not have to be a painful process, and if started early, it would be best to address any issues your plan has without waiting for a call from IRS. Just make sure you work with someone who is an independent fiduciary and who is not trying to sell you anything, and remember that your TPA/plan provider/broker is not a fiduciary, so they don’t have to tell you anything about your plan’s problems.

Well, since your plan has an adviser, they should be taking care of you. AIF means nothing – if they are not an ERISA 3(38) fiduciary, they are not even a fiduciary for your plan. And even then nobody says that an ERISA 3(38) can’t overcharge or use high cost funds – I’ve seen it all.

Often, advisers have no idea about plan administration, and there is little or no communication between the TPA and the adviser. If they are getting paid with assets under management fees, they would have no interest in doing much for your plan since they are getting paid regardless. Many advisers are also compensated with revenue sharing, etc., and this creates a conflict of interest. All of this can be determined from your plan level and participant level fee disclosures (and you should ask for a copy of each).

Your plan should be reviewed by someone who does not have a conflict of interest, who’s independent (and not compensated based on assets) and a fiduciary (not someone who gets revenue sharing and/or sells products). We often do plan reviews for potential clients, but this is not an easy job especially if there are admin issues. Ideally your plan adviser and TPA should be taking care of you. If plan adviser is not doing their job (i.e. using high cost funds instead of index funds, gets revenue sharing vs. eliminating all funds that pay revenue sharing) it might be time to change the adviser – it is their job to get you the best plan cost-effectively. Also, the TPA should not be charging asset-based fees or collecting revenue sharing as well (and many often do) – and all of this is apparent from the fee disclosures.

So start with a copy of participant level and plan level fee disclosures, and this would give you a good idea as to who is compensated with what. If anyone is getting asset-based fees and revenue sharing, that’s a sign that you are getting conflicted advice.

Alternatively, you can make your salary deferral contribution into your own solo 401k plan. You might also be able to make an after-tax contribution (and convert this to Roth). This is always an option. So you would do $18k salary deferral, ~20% profit sharing, and the rest (up to your net income) as after-tax (and this amount can be rolled over into a Roth IRA).

Ok, so I can put $18K salary into individual, + 20% profit sharing = $24k. Then I could put $53k employer contribution into the practice 401k? I’ve requested the fee disclosures and have a call set up with our plan advisor next week. I’m gathering information to present to my partners so hopefully we’ll switch to a better plan.

Yes but the $53k would have to come from profit sharing for the practice plan, and that has to be part of your plan’s design, so chances are unless your plan allows profit-sharing only $53k contribution, you won’t be able to max out without doing salary deferrals as well. So I think you should contribute the max you can into your solo 401k (and top it off with an after-tax contribution up to $30k), and contribute the max you can into your practice 401k with profit sharing only.

The guidelines for having the best plan is really simple:
1) Work with an adviser who is a fiduciary (ideally a 3(38), but you really have to be on board with what they are doing).
2) Work with a standalone/independent TPA (and have adviser communicate with the TPA regularly)
3) The fund lineup should be low cost index funds that don’t pay any revenue sharing.
4) There should not be ANY asset based fees inside your plan (aside from your fund expense ratios, which should average to about 0.15% or so). There maybe several bps that record-keeper charges, but that’s about all.
5) If you have multiple brokerage windows, those have to be cleaned up (many group plans don’t have clear policies on brokerage windows – not only would this avoid having to pay extra for admin, but it would also keep the plan in compliance, as there are some potential issues that can be avoided if there is a clear policy in place)

Thank you for the free advice. I was able to get both the plan and participant fee schedules. It looks like we’re being charge 79 bps for an “Effective Management Fee” and 31 bps for “Sales Fee” for a total of 110 bps in addition to the fund expense ratios, which average more than 1%. I assume these are the asset based fees that should be avoided?

Management fee and sales fee are not paid through expense ratios of the funds. They are usually added to the fund expense ratios to arrive at an ‘all in’ expense ratio, so it sounds as if you are quoted expense ratios that include the 1.1% fee, in that case I’m guessing that your average fund expense ratio (with those fees included) is closer to 2%. Look up your actual market expense ratios for these funds. Then you’ll know what the total fee is. The math has to work. A typical manged fund costs from 0.5% – 1.5%, and the only fees paid out via expense ratios are 12b1 and revenue sharing, as far as I know. Revenue sharing is usually credited towards plan administrative expenses, but if it covers expenses fully, no more crediting is done to offset any other expenses (unless your document says otherwise).

Bottom line – you are getting fleeced. A typical plan that I work with has an average fund expense ratio of 0.15%, and a total asset-based fee of 0.05% (record-keeper charges this, so we can’t avoid it). A fixed fee would save your plan significant amount of money given how much a group like yours would contribute to a retirement plan.

Update:
I scheduled a phone call with the plan’s advisor clarifying the fees and ask to add some lower cost funds to the selection. During the conversation, he tried to explain to me why the actively managed funds in the plan were better than lower cost index funds, then (I couldn’t make this up) tried to sell me an annuity.

My practice is likely to merge with another group within the next 6 months and my guess is that we’ll go with their 401k. Otherwise, we’d be changing plans and advisors immediately!

I did open an individual 401k plan with Vanguard. Unfortunately I’ve already maxed out my employee contribution to my current plan but will put 20% of my call income into this plan.

Question: I understand that employer contributions can be written off as a business expense. What about employee contributions? If I contribute those to the solo401k they’ll be from post-tax money and I’m sure that I’ll have to give my accountant some guidance on this.

But of course. This is typical. However, no guarantee that the other group’s plan is any better for that matter. That’s something you might want to find out beforehand. For 1099 income both types of contributions can be deductible on your tax return unless it is an after-tax contribution. Your accountant is the one that has to give you some guidance on this, not the other way around.

I will be starting an attending job soon and wanted to ask for your advice. These are my plans. Please give your input. thanks.

I will have a full time job as an independent contractor setting up my solo 401k and making $55k contribution (or whatever max is allowed in 2016).

Additionally, I will be doing part time(expecting to make around 60-80k per year) in my university hospital that offers 401a, 403b and 457.
401a – they will be taking 7.5% off my salary and putting it into my retirement account.
457- I will be contributing 18k (I assume that this doesn’t count against my solo401 max)
403-nothing here since I’m making full contributions on my solo 401k

backdoor roths for me and spouse-
investing in real estate like crazy(my spouse’s father is very experienced in RE and will help us out).

Well, I by no means am an expert on this specific subject, but could you contribute the $18k max into the 403b and make $52k profit sharing contribution into the solo 401k? This of course depends on the amount of net profit from your independent contractor business.

I have a question if I meet the rules, as I could not get any clarity from my accountant. My primary practice is pain management, where I am a partner in an S-corp (now up to three partners). We draw a base salary of $x/month. We get profit sharing based on production and % of ownership (for designated health services) which has been significant in the past, like up to $3x/month. We have a company sponsored 401k. I contributed my maximum ($18k in 2015) each year I was eligible and the company matches 100% up to 4% of income ($10.6k in 2015). I also have a separate LLC, where I provide anesthesia services unrelated to my pain practice. I have a self employed 401k where I contribute 20% of my income. My questions:

1. Can I still contribute $24.4k (53-18-10.6) into my company sponsored 401k?
2. Does the contributions to my self employed 401k reduced the 53k max, i.e. can I contribute $53k to both? I have never been close to the income level in my LLC for 20% of my income to >/= $53k.
3. Is there anyway to retroactively contribute funds to the years I did not hit the maximum, as I only learned about this in the last week?

1. You can contribute $53k in each of the two plans, with the only limitation being the salary deferral ($18k) that is shared between both plans. So if you put $18k into one of the plans, the 2nd plan should be profit sharing only. You can instead have the $18k go to your solo 401k, but then you have to make sure that your practice plan allows you to max out with profit sharing only (not all do).
2. No, but you can contribute after-tax up to $53k in profit sharing only (~20%) into the solo 401k. So as long as your profit is $53k or above, you can put away 20% in profit sharing and the rest as after-tax contribution that can be converted to Roth.
3. No. It does help getting good proactive advice for moderately complex situations such as yours. I would also make sure that your 401k is a low cost plan with no asset-based fees (either administrative or advisory). Chances are you can have a ‘brokerage only’ plan where every participant opens their own account if you only have 3 partners. However, that’s not possible/preferable if the practice has any non-spouse employees, in which case you need a record-keeper. To allow after-tax contributions into your solo 401k you will need a custom plan document.

Thank you for the reply. I am still a little fuzzy on your response 1.

1. I currently am putting 18k in salary deferral in my pain practice’s 401k (and we do have 30ish other employees), and the solo 401k (since I am the only owner/employee of my LLC) is only profit sharing, i.e. I am only putting 20% of my net income from the LLC into this plan. Am I doing that you are saying and not violating any tax codes.
2. I will need to read more about the conversion to Roth, as I started this business to help some friends who had a need for anesthesia, so the money is essentially irrelevant for me – it basically gave me a vehicle for extra tax deferred retirement.
3. I think we may have too much advise and not enough communication – we have our 401k/disability insurance guy. We have a corporate accountant, and I have a personal financial advisor who I have been working with before I started residency. Problem is sometimes we get conflicting advice, and I end up following my financial advisor, as my older partner and I have very different perspectives on personal financial planning.

1. You can put away $18k into your practice 401k. If your 401k is also designed to have profit sharing, you can put away up to $53k into your practice 401k. With 30 employees and 3 partners, I’m not sure that would be a good idea though. You can put away $53k into each of these plans, but salary deferral ($18k) is shared by both plans.
2. My comment was about how to put away $53k into a solo 401k plan without having more than $53k in net profit.
3. Sounds like it. It also does not sound like your 401k guy is a fiduciary – he probably makes commission from selling the plan (and plan investments) to your practice. Corporate accountants don’t know very much about retirement plans, and I’m not sure about your personal financial adviser. Doctors and dentists have very unique needs, so you need to make sure that 1) your adviser is a fiduciary and always acts in your best interest, 2) they are knowledgeable about retirement plans and multiple plan rules and 3) they are compensated by hourly or flat/fixed fees vs. AUM fees (which again create a big conflict of interest, not to mention a huge added cost for doctors who will accumulate significant portfolios).

1. No. Not if the plan doesn’t allow it.
2. Ideally, yes. If the companies qualify as being unrelated, and I think they do since you only own 1/3 of the other one, and you make enough at each one to get $53K in, and the plan documents allow it etc. But if you’re only making $100K in your LLC, then you’re only going to be able to contribute $20K.
3. No. Wouldn’t that be convenient.

You don’t need an LLC to have a solo 401(k), but you do need a federal EIN. You cannot set it up if you have employees unless the only employee is your spouse plus other employees you can exclude from the 401(k) (such as your kids.)

Max contribution is $53K, but that depends on your income and other retirement plans and relationship between companies. Not enough info to tell you what your max contribution is.

Hi,
I have llc and 2 solo 401k(etrade and Amritrade)
Q1. Can I contribute to both as both are solo?
Q2. can I contribute more than total 53k ?
Q3. Is it possible to contribute to solo401k without running a payroll every month? If Yes how?
.

Why do you have two solo 401(k)s. You almost surely should not have that. Why not combine them? I hope you’re not contributing to both in the same year. That could get really messy.

1. No.
2. No. If they’re both solo 401(k)s, then the companies they are each tied to are by definition related to each other, so share the same $53K limit.
3. Not sure what you mean by “running a payroll.” I don’t think I ever “run a payroll” and I’ve been using a solo 401(k) for years. Can you explain what you mean by running a payroll? If you really have a bunch of employees you’re paying you probably can’t use a solo 401(k) anyway. If it’s just you, why are you “running a payroll?” Just transfer some money out of your business account to your personal account as an owner draw.

Very interesting article. My husband and I aren’t doctors, we are computer programmers; but I found this article through a search of “multiple 401ks”. Combined, we gross over $200,000 a year together so we are trying our best to shelter as much income in retirement accounts as possible. My husband works as a W-2 employee for an employer who has a 401(k) where he can contribute about $15,000 per year maximum due to 401(k) rules concerning highly compensated employees. We both work from our home.

I take all of my income as a 1099 contractor, and I have a solo 401(k) through Vanguard. My husband does work for the business, maintaining my firewall, hardware, etc. so that I have the ability to earn income by writing software for a client; but in previous years, we Haven’t treated him as an employee of my business. We are both over 50. Since I am making enough income this year to fully fund my $24,000 employee contribution, as well as 20% of my net business income as employer contributions, and there is still money left over, we were researching the ability to fund contributions in my solo 401(k) for him. From what I understand, I can contribute 20% of my net business income as an employer contribution for my husband as an employee, as well as up to $9000 in employee contributions for him to a max of $59,000 for each of us (not that I’ll be seeing enough income to come anywhere close to that).

It’s 20% of what you’re paying him (technically net of the employer share of payroll taxes, usually 18-19%), either as an employee or as a partner plus $3K unused “employee” contribution. This assumes he’s under 50. If over 50, that goes up to include the catch up contribution.

Hi white coat investor, thanks so much for a great website and book. I’m a fellow getting ready to choose between three practices. The place I’d really like to work offers a 401k plan but there is no match from the company. Am I allowed to decline the company 401k plan and choose a different vehicle for retirement investing and get more than 18k put away?

If you are a partner-track employee, you might eventually have a say in how the 401k plan is administered, depending on the size of the practice, of course. So one thing to consider would be whether you will have any ability to influence the direction of the 401k plan at the practice. This way you might be able to add profit sharing to allow you to max out your contribution at $53k. If you don’t participate in their 401k, unless you get paid with a 1099 you don’t have any other choices (other than Traditional IRA and after-tax).

Thank you for the amazing advice. I have read all the comments because I learn so much more detail about unique circumstances. I get a W2 from my employer and maximize 401k contributions of 18k with a match at the workplace plan.
I also have a question:

I received and continue to receive K-1 income from a surgery center and 1099 income for consulting. I think the best thing to do is to make a sole proprietorship for myself and request an EIN for myself immediately to be able to have surgery center distributions and consulting fees paid to the EIN rather than my personal SSN. That way I can put 20% of this income into a solo 401k.
For the income that I earned prior to my EIN and was given on my SSN, can I still consider this as my sole proprietorship income and calculate 20% of the non W-2 2015 income for solo 401k purposes, or only K1 distributions and 1099 income that specifically have the EIN going forward the rest of the year?
Thanks!

I would use all of the sole proprietorship income. It is all legitimate self-proprietorship income. You don’t need the EIN to file taxes, only to open the individual 401(k).

Bear in mind the K-1 income IS NOT from your sole proprietorship and so can’t be used for an individual 401(k). Also, bear in mind that distribution income isn’t earned income, and so can’t be used toward what goes into an individual 401(k).

That might change if the partnership doesn’t have a 401(k) or something (mine does), I’m not 100% sure. But if it does, you have to use that, not your own individual 401(k).

The 1099 consulting income makes sense, thanks. I’ll calculate the entire year’s consulting income then put 20% into a solo 401k once I get my EIN.

The surgery center does not have a 401k plan, and gives monthly “distributions” based on profits from the previous month from cases, not capital gains. This is given as K-1 income. So I can’t put 20% of this into my solo 401k? This is true even if I have surgery center checks distributed to my EIN rather than SSN? I thought K-1 income was treated similar to 1099.

If you haven’t used your employee 401(k) contribution elsewhere, you can use it in the individual 401(k), so that would be $18K + 20%. But you still can’t use your non self-employed income.

K-1 is self-employed, earned income from a partnership. If there is no partnership 401(k), then you probably can include it in your self-employed income but you’re probably limited to just one $53K total 401(k) contribution. You might even be able to open a 2nd one if you don’t own much of the partnership, but I’m not 100% positive on that.

Bear in mind a K-1 distribution is earned income, but an S Corp distribution is not.

“I received and continue to receive K-1 income from a surgery center and 1099 income for consulting. I think the best thing to do is to make a sole proprietorship for myself and request an EIN for myself immediately to be able to have surgery center distributions and consulting fees paid to the EIN rather than my personal SSN. That way I can put 20% of this income into a solo 401k.

For the income that I earned prior to my EIN and was given on my SSN, can I still consider this as my sole proprietorship income and calculate 20% of the non W-2 2015 income for solo 401k purposes, or only K1 distributions and 1099 income that specifically have the EIN going forward the rest of the year?”

What might be a good idea is to have an entity (not sole proprietorship), but an LLC (possibly taxed as S corp, depending on whether that provides a net tax benefit) and have both your 1099 and your K1 income go to that. You can then contribute 20% (or even 25% if you give yourself a W2 from the LLC taxed as S corp). In addition, you can then also have a Defined Benefit plan (even if you are in your 30s) with the combined income (if it is high enough to warrant this type of plan).

This is something that your CPA should help you with, especially having all of the 1099 income going to a single entity. Not only will you be able to do some advanced tax planning, but you can also maximize your retirement plan contribution by using the right entity.

With regard to the “K-1 distribution is earned income”, here is the question:

I am working on a locum basis and have a solo 401(k) with Vanguard and maxed out.

From my investments (private equity and real estate), I also received and will receive (when exit the private equity investment) K-1 distributions. So can I open a separate solo 401(k) for these non-locum earned income from investment? If yes, how do one separate them as the income all come to one single SSN?

You can’t contribute anything from real estate investments into a retirement plan. The answer is no. But you can have a combo plan – 401k plus DB and depending on your age and your income you can contribute a significant amount on top of your 401k contribution.

Do 401a contributions count towards the 18k limit for employee contributions to employer 401(k)s and 403(b)s?

My fellowship program requires that I contribute 7.5% of my salary to its 401a. The investment options in the 401a plan are pretty terrible. I also moonlight at a hospital connected to my fellowship program and am paid via a W2. That hospital offers me a 403b and they match 3%. The investments in the 403b are excellent.

My question is, does the 7.5% salary that i have to contribute to the 401a subtract from the 18k total that I can contribute to 401(k)s/403(b)s?

Unfortunately, 401a, 401k and 403b all have the same 402g limit of $18k. The Finance Buff has this one wrong. However, I believe you can opt out of 401a, and they can’t require you to make a contribution. Typically the employer is the one who is making the 7.5% contribution – otherwise why bother? In some cases employees are also able to make a contribution that is fixed (and irrevocable), but it should be up to you. Please find out exactly what the rules are.

I’m not sure that’s right. I’m pretty sure I’ve seen lots of folks with 403(b)s and 401(a)s. I think the 401(a) contribution is consider all employer so it doesn’t count toward the $18K limit. It may count toward the $53K limit though.

Right, except in this case it is all done by the employees. So we are talking about 402g limit – this is common with all of these plans (except for the 457b). If it was employer contribution only, then yes.

Just to clarify, 401a and 401k and 403b all share the same 415 limit. Maybe if we had different employers, things would be different, but the rule of thumb is that 401a is just like a 401k (despite all of the differences in plan provisions) and 401k shares the 415 limit with 403b, just like it shares the 402g limit.

I’ve got additional income from consulting as well. My understanding is that I would subtract the $18K from my 403(b) contribution amount from the $54K 401 contribution cap. I would not subtract the 401(a) contribution because it is an employer contribution.

So I would be left with $36k of room for a self employed 401(k). If I had $10k of income I could defer all of it as an employee contribution. On $20K, I could put $18k as employee and $2k as employer… Am I understanding this correctly?

It’s $55K for 2018 and the employee contribution for 2018 is $18.5K, so it would be $36.5K into the solo 401(k), assuming you had enough income to do that. But it would be only employer contribution since you burned your only employee contribution in the 403(b).

I’ve posted here before but basically my background is: employee physician with 403B/457B maxing out both and doing backdoor Roth for wife/ myself. I also have an S corp and get 1099 income and I will be doing a s401K later this year (25% as employer contribution).

My wife works for me part time (earnings will be less than 10K this year) as an employee. She is not part of the S-corp. Can some of these earnings be used to open a s401K for her?

She has an old 401k from a previous employer, currently works as a freelance graphic designer and has her own LLC for the design company.

Can we put some of her earnings from my S corp into a s401K for her? If so, will that s401K need to be opened under my S Corp?

Yes. She can use her self-employment income toward her own solo 401(k). If you wish to also include her in your solo 401(k), I believe you can do that as well. And yes, it would need to be under your S corp EIN.

Hello WCI. I recently found your blogs and have learned so much. Am working on rolling over SEP and another IRA to my employer based plan so I can do a back door roth without prorata issues.

But I have new questions after reading this blogs.

I have an S chapter and employ myself and 3 other staff. Until this year I had done SEP for myself from S chapter. ‘But now my staff has been with me for 3 years and funding them at the same % is cost prohibitive.

I also work part time for a university as W2. I am maxing out my 403b there 18,000 a year. Not eligible for employer match.

Can I open a 401k (or simple IRA) for the 4 of us with the S chapter and still max out my W2 403? I have been told no and that 18,000 is my personal max between the two situations. But perhaps this is incorrect? Can I do 18,000 for w2 403 in addition to 401k /simple IRA for the S chapter?

Yes you can. You can max out your own 401k with profit sharing only. SIMPLE IRA won’t be possible with a 403b since in that case your $18k would be shared. It will depend on your salary. Also, your plan would have to be designed right to minimize employer contribution, and this will depend on your demographics. A design study would have to be done to see how low your salary would need to go to 1) maximize your contribution and to 2) minimize employer contribution.

I am employed by a university and max out on both a 403b and a 457, plus just opened up a Backdoor Roth (which I learned about through you), and enrolled in the family HSA. I have no other retirement accounts.

Here’s my question: I have earned a small amount of 1099 income through some freelance editing work, $2700 in 2015 (probably will be about 2K in 2016). Is there any benefit to opening a solo 401k, which I understand would only be 20% (or $540), as I am only eligible for the employer contribution due to having maxed out the 403b? Would a 401k be helpful to have if I ever left my current employer?

Yes. You could put something like $500 in it and then you have it available later to roll 401(k)s into should you ever need to do that. Presumably your individual 401(k) would have lower costs and better options than your work 403(b), but that’s not always true. Plus, you may have more self-employed income later.

Only you can decide if it is worth the hassle. But you better get started as it takes a little while and you need to do it before year end.

I’m having a little trouble convincing my CPA that I can do this :), but honestly I am not 100% clear about the “unrelated” piece myself.

In our case, my wife and I have an SCorp with a Solo 401k where she “assists” and is a minority owner. She also gets a 1099 as she’s an independent contractor with another firm (which is really her main job). It seems that she should be able to set up a separate Solo 401(K) for her 1099 work and make the full 53K contribution in both Solo 401ks. However, my CPA says that these are not “unrelated”, and hence 2 x 53K contributions are not possible.

If he’s correct, would it help to have her just as an employee of the SCorp but not a part-owner?

Yes. A sole proprietorship is a disregarded entity, so even if your wife actually sets up a corporation (which would be the right way to avoid a single 415 limit), the two businesses are still very much related because both of you control 100% of one and your wife controls 100% of the other. If however, your wife controlled less than 50% of one business and 100% of the other one, and the other 50% was controlled by an unrelated party, then we could have had two 415 limits.

However you might be able to have the income from the 1099 go to your main entity and if that’s enough income, you might be a good candidate for a Cash Balance plan where both of you can contribute significantly more than to a 401k, so that would fulfill your need to shelter more money from taxes.

As employee she’d still have a single 415 limit. Both of you are still deemed to have 100% control over your practice, so it is still a controlled group however you slice it. It would be better to maximize both of your W2s for the S corp for the purpose of maximizing a DB plan, so if you are old enough (at least 35) to take advantage of it, that’s what I would recommend.

I work as an employee at Job A and will contribute 18k in 2016 with no employer match to my crappy employer sponsored 401k.

I work as an independent contractor at Job B and will make ~$50k this year. From what I’ve read and understood, I can make an employer contribute approx. 20% of the $50k = ~$10k into a solo 401k at Vanguard.

I have until filing taxes in 2017 to contribute to the solo 401k.

Is this correct?

Also, I worked the first half of 2016 as a resident with no 401k employee contribution, but the employer match to a 2015 contribution was distributed in 2016. Does this employer match still count toward my 2015 limit?

I agree that putting it all in my solo 401k would probably be best since the expense ratios for my employer sponsored 401k are terrible and there is no match…but am I allowed to opt out of my employer 401k and contribute the 18k into my solo 401k from my employed earnings, plus top out whatever I can with an employer contribution from my 1099 work? If it’s already too late this year, am I able to rollover the 18k that’s already in my employer sponsored 401k?

Of course you’re allowed to contribute your employee contribution to any 401(k) you qualify to use. If your employer isn’t going to provide an incentive to use his plan (a match, low fees, or good investments) and you can avoid it, might as well.

You lost me. As far as your employed position goes, you’re limited to what your employer offers. For your self-employed work, you can get your own individual 401(k). You get two $53K limits and one $18K limit. Since all your employer will let you put in is your $18K employee contribution, and you can put that into your individual 401(k) with no decrease in total contributions to both plans, might as well do that.

Thanks, I think I understand now. I would like to clarify…so for this upcoming year, I should just max out my individual 401k for my 1099 work with the 18k max employee contribution plus roughly 10k of the 20% “employer” contribution also from my 1099 work(~50k earnings/yr) and have no contributions to my employed position since there is no 401k match and I’ve used up my 18k contribution. Does this sound correct?

Logistic question: I just opened an individual 401k for my 1099 work. Would I be able to contribute both my $18k plus my employer $10k(20% of income) at the same time, and from the same bank account? Does it matter which account(s) the money comes from?

As a related questions, how important is it to have separate accounts for my personal checking and 1099 income? I understand that it would be easier to track expenses with a dedicated business account, but my 1099 work is through a locum tenens company, so most of my expenses are paid for and not deductible. Also, I’m under the impression that separating my personal from business accounts would not protect my personal account from being tapped in the event that I were sued and I lost…is this correct? Are there other factors that I should consider in deciding whether or not to open a business account?

Yes. You can do both employee and employer contributions into your i401(k) at the same time from the same account. It doesn’t matter which account the money comes from to Vanguard or Fidelity. I think it’s a good idea to have a separate bank account for your business. Your 1099 paychecks get deposited there, you pay your i401(k) contributions from there, you can pay your estimated taxes from there, you can pay any other business expenses from there etc. Required? No. But it’s a good idea. You’re right that there is no significant additional liability protection just from having another bank account. It’s mostly just to separate things.

I own two business as a “Sole Proprietor” and they both operated under my name. The businesses are unrelated. The first business is a self-employed software developer, the second business is self-employed personal care manager. I receive 1099-MISC for each of my business and I expect to earn about 50K in each in 2016. I already have Solo 401K plan for my first business. My question is – do I need to open a second solo 401K plan for my second business to maximize the total contribution for both plans 2016.

Those two businesses ARE RELATED by virtue of the fact that you are the sole owner of both. Sorry. Your limit is $53K total if you have enough income. But since you’re only making like $100K, you’re only going to be able to put $18K + 20% * $100K = ~$38K total. That all assumes we’re talking about 2016 and you’re under 50.

This is my situation
1- full time job 401k- w2(employee 18k and employer 9k)
2 – self employment s corp no w2 ; 1099 from one of the other companies but billing under my own company.
With the above equation can I maxout my contributions especially since I don’t have a w2 income from my self employment

There’s a lot of comments here, but I don’t recall seeing the spouse exemption for a single owner company w/Solo 401K. It magically doubles the “owner-employee” contributions ($53K for each person) subject to the usual income caps for company contributions. If the income supports it, one company can effectively contribute $106K to retirement account(s) for the husband and wife.

There is no exemption of any sort. If your spouse can not be justified to get a salary high enough to max out a solo 401k, you are an audit risk. Remember, if your 401k plan is disallowed (which it would be if it turns out that your spouse’s salary is excessively high), you will have to pay back all of the taxes (potentially with penalties). Don’t play this game unless your CPA can justify your spouse’s salary in an IRS audit. Better yet, get a written opinion to make sure that you are doing it right. If your spouse co-owns your business, that’s one thing, but if their job description is of someone who’s making $50k for equivalent services, they can’t get $200k for it.

If you want to invest in something that requires a self-directed solo 401(k) (like real estate) it’s fine. But bear in mind costs are usually higher than what you would get at Vanguard, Fidelity, eTrade etc.

What higher costs are you referring to? The initial plan setup is a few hundred to a couple thousand dollars for the plan documents. There aren’t any other fees beyond that aside from the direct costs associated with making an actual investment. Those should be the same regardless of where the money is coming from with the possible exception of discounted fees for large account holders at Fidelity, Vanguard, et. al.

These accounts require a lot of supervision, and you would definitely need a Third Party Administrator who knows what they are doing. I see that there are lots of places that ‘sell’ these types of accounts, but I would advise against buying a cheap off the shelf plan document, and instead hire your own TPA (and consult with them prior to opening this type of account to understand the benefits and limitations). The costs are definitely higher because if you hold real estate (or other investments that are hard to value) you’ll need to do expensive valuations from a reputable company every year, and your TPA has to monitor your plan for compliance – it is not a set and forget type of plan.

There are definitely legitimate uses for self-directed 401k plans, but I would suggest that plain vanilla 401k should provide the bulk of one’s investments. If someone is using their 401k as a piggy bank for speculative investments, that is an issue all by itself because to build wealth one needs to diversify and hold a good amount of assets that are relatively safe, and if all of one’s assets are in a speculative investment this can be a recipe for disaster.

The entire point of a self-directed 401K is eliminating the need for a 3rd party to be involved and it certainly doesn’t involve much work from my perspective. Certainly much less that using 3rd party trustees when I was raising money from individuals for real estate transactions. There’s an annual renewal document along with the standard IRS form for accounts with over $250K. Nothing else.

I disagree with your thoughts about how 401K funds should be used. That’s entirely up to the person putting away the money. Your speculative investment might be their next Uber investment. Many company sponsored 401K plans are extremely limited in the range of investments that are offered. A slate of only five mutual funds wouldn’t be unusual and might not even include an index fund at all. You have ZERO control over the plan guidelines as a typical employee. If the self-directed fund is held at Schwab or Fidelity, it generally offers access to all of their available funds.

Other useful benefits of self-directed plans include the ability to loan up to $50K to yourself without penalty, fund your own startup, fund real estate deals and make private loans to individual and entities. The entire point is flexibility in the same manner that starting your own 401K plan and funding it to the tune of $53K annually is far better than accepting the standard employee plan of $18K with a 3% contribution match.

Not everyone would agree that getting returns over 7% involves taking on significant additional risk. Hard money loans secured by real estate can yield 15% APR with points paid up-front. The note gets paid as expected or I pay $500 for a boilerplate foreclosure proceeding. Or I might have the title placed in escrow as part of the deal terms for new investors without a track record.

I am trying to better understand rule #7. I work at a public hospital. I have a 457 that I put $18k in. I also have a 403b to which I contribute $18k and my employer $35k. I do consulting work on the side that I get a 1099 for. Am I able to open a solo 401k and make an employer contribution? Or since my 403b is fully funded am I not eligible? Thanks!

Excellent post and commentaries as usual. But I am getting a little lost in the weeds, so I would like to ask about my scenario for 2016—

Employed doc and I made an $18,000 Roth contribution to my employer sponsored 401K (no employer matching or contribution).

I also worked a separate locums tenens job for 1099 income.

I set up in 2016 a solo 401K, given my eligibility to do so from the locum tenens work. I also plan to do a backdoor Roth contribution (if I understand correctly, I have until April of 2017 to make a backdoor Roth contribution for 2016).

Questions:
(1) What is the maximum amount I am allowed to put into my solo 401K for 2016?
(2) What proportion of my 1099 income can I put into my solo 401K for 2016?
(3) If in 2017– I loose the employee 401K contribution from my work as an employed doc (practice change), but get income from ownership in a non medical LLC business (contemplating starting), what are the maximum amounts I would be able to contribute to my solo 401K for 2017?

1) ~ 20% of your self-employed earnings up to a max of $53K
2) ~ 20% of your self-employed earnings up to a max of $53K
3) Only earned income can go into retirement accounts. Not sure if your LLC is earned income or not. But without the employee contributions at work, you can contribute $18K (if under 50) + ~20% of your self-employed earnings up to a max of $54K.

Sorry if this was already covered in the prior comments.
I work as a full time Locum Tenens doc (1099 income). If I worked for two different hospital systems but was placed and payed through the same Locum Tenens agency, would this qualify me for one or two Individual 401Ks?

There is one business with two customers so only one 401(k). The hospitals are the customers and the business is you. Now if you were an employee at one of those hospitals, the situation might be different.

As WCI said, your 401k contribution limit from multiple 1099 jobs is still $54k. If all you are looking to do is to contribute $54k x 2 into a retirement plan, and you are at least 35 years old and believe that your situation will be stable for at least 4-5 years AND your total 1099 income is going to be around $400k or so, then you might be able to contribute about this much into a 401k plus Defined Benefit combo plan (and more as you get older). If that’s indeed the case, then I would recommend doing an LLC taxed as S corp and paying yourself a W2 of $270k to max out such a plan. As a 1099 contractor you have the ability to utilize this type of plan, but you have to be absolutely sure that your situation won’t change next year – these plans are designed to stay around for at least 4-5 years, but you can easily contribute $100k or more (depending on your age and income).

Unfortunately (or maybe fortunately 😉 ) I am 32 and single…
Also my situation will not be stable because I am not sure if I will stay on 1099 for the next few years or settle into a permanent position (or some combination of both).
Good to know for the future, though.
Thanks!

Have a clarification question. Basically, I am trying to figure out if the EMPLOYEE contribution ($18k) across all accounts for a Solo 401(k) is in any way limited by the 1099 income? (vs the EMPLOYER contribution, which is 20% of 1099 income per above).

Simplified situation:
Medical resident receiving 1099-MISC yearly for $600 “reimbursement” attending a conference (this is a fixed fee that they pay and they don’t actually require or ask for any receipts, etc., so I am assuming this is why they send a 1099-MISC as “income” rather than some other non-taxable mechanism).

Residency program has 403(b) with NO MATCH and not best investment options. With my $600 total 1099-MISC income per year, can I open a Solo 401(k) with, e.g., Vanguard, and contribute $18k to my SOLO 401(k) if I contribute $0 to my not-as-good-investment-option residency-program 403(b)?

Actual situation:
They give $500 check and DON’T send 1099-MISC, although they talk extensively about how they will send it in the letter and require a W-9 form. I believe this is because IRS requires 1099-MISC only with $600 minimum, but I am required to report any such income over $400. I DID report it on my 1040 last year, still thinking about this year’s 1040.

Also, what happens to the Solo 401(k) if I no longer receive a 1099-MISC (or have no 1099-MISC income) in a given year?

Second of all, if it is reimbursement, it isn’t necessarily income. It’s a business expense of your employer. That might mean it is neither taxable, nor useful for contributing to retirement accounts. I am not clear on what this is. But they don’t have to send you a 1099 for reimbursement, so I guess maybe it is earned income.

If you don’t put any money in the 403b, and this is really earned income, then you can contribute $600 to to the individual 401(k). Up to $120 of that can be employer contribution and the rest employee.

But no, you can’t put $18K in there. You didn’t earn $18K in your business. A 401(k) is connected to a business.

[Update/Correction 2/8/17: After further discussion and research, it sounds like the item being discussed in this discussion is “Other Income” that goes on Line 21. As an employee without a business who doesn’t itemize, you’re not going to be able to deduct this at all. Still, better to get the money, even if you don’t get all of it due to taxes.]

Thank you so much for the clarification re the maximum amount that can be placed in a solo 401k in terms of the total of the employer and employee contribution (in my case, same as 1099 income).

I don’t know exactly why the payment is categorized as 1099 misc. just to clarify, this is a $500 check from a specialty medical organization given to all residents who attend the conference and pick it up by that organization. I believe the money comes from a corporate donor (not a pharmaceutical company).

I realize that I am supposed to the report the amount and that is why I did so last year. I also know for a fact that not a single one of my co residents, all of whom received the same check, reported it.

The complicating thing is that my expenses just for flight and hotel are MORE than $500. Last year, I tried to report is as self employment income in TurboTax and deduct travel and lodging expenses. However, my net business income was a loss, and TT warned me of a high risk of audit so I just reported it as personal 1099 misc income without deducting anything (have standard deduction for myself and wife which obviously is more than $500).

Personally, I’d deduct the loss. But if you’re worried it’ll trigger an audit, then feel free not to take the whole deduction. Businesses can lose money for 2 of their first 5 years without being classified as a hobby.

Here is the exact text from where we sent in our W-9s (with the specialty medical organization name replaced with ***):

“NOTE:
Any resident receiving an Attendance Grant will receive a 1099-Misc Income Form from the *** that will be reported to the IRS in January 2018. However, receipts for meeting costs for items such as air travel, hotel, and transportation should be retained and may be used to offset the income reported on the 1099. Please consult with your personal tax advisor for instructions on how to report these items on your tax return.”

Again, I am actually losing money by going to the conference, so this $500 is only offsetting my expense but does not cover them.

However, my confusion is about how this is really a “business”/self-employment pay (filed using Schedule C). My goal is not to make money, but to attend a conference without having to pay too much, no? Ultimately, is that really a business? I am just trying to figure this out because playing around with TurboTax like I did last year would cost me $40 to upgrade (bought Deluxe this year) and also I want to know what to tell the IRS in case I get audited (obviously, this is unlikely over such small amounts, but I want to make sure I am doing the correct thing so that I don’t buy Home & Business for $40 and then end up not really using any of the features like I did last year).

But, if you’re getting a 1099 you’re in business. Your business is MK, MD. It’s a sole proprietorship. It reports its income and expenses on Schedule C. Some years it makes money. Other years it loses money. It lost money last year. It lost money this year too. Hopefully next year it makes money.

Hospital #1: Earnings of$300,000
I receive a W2 as a part time employee of this hospital.
As a part time employee, they do NOT offer any employer contributions like they do their full time employees, but as a part time employee they do offer putting a percentage of my income to the following retirement plan set up with fidelity:
1) Pre-tax 401K (max of $18,000 including option #2)
2) After-tax Roth 401K (max of $18,000 including option #1)
3) After tax contribution (max of $15,360)
Option #3 essentially is an after-tax contribution where you pay tax on any earnings made when you withdraw the money in retirement. As you can imagine this is not ideal, therefore it is not worth leaving your money in this for retirement as any earnings will be taxed.

Our financial advisor recommended to put money in either in #1 and/or #2 to max out to $18,000.
They also advised to max out #3, and convert this money on a quarterly basis to the #2 Roth 401K option. Any earnings made in #3 before conversion will be taxed, but by doing this on a quarterly basis (the maximum allowed for this plan) you can minimize this taxable amount. This taxable amount will be received at the end of the year via a 1099 form.

Independent contractor at Hospital #2: Earnings of $150,000
I also work as an independent contractor (as a sole proprietor) at another hospital and receive a 1099. I have a self employed 401K plan with fidelity.

Is the following correct in terms of the maximum I can put into retirement in my self employed 401K. I am unsure if the $15,360 would play a role in the maximum I can contribute.

The first question that comes to mind is what is the point of having a financial advisor if you have to check his work with some random blogger on the internet? If I was paying an advisor thousands of dollars a year for advice, I sure as heck would not expect I’d have to check on it with anyone. I assume you’re just looking for a second opinion, which suggests either you’re worried he’s giving bad advice or considering a DIY approach.

I think your best option is going to be to use your employee contribution in your individual 401(k). That means about $48K in there, divided between an $18K employee contribution and a $30K employer contribution. Then contribute $15,360 of after tax money to the 401(k) at Hospital # 1. Check with them if they’ll let you put in more post-tax money if you don’t put in any pre-tax or Roth money. Maybe they’ll let you.

Then you can do a personal and spousal backdoor Roth IRA in addition to all that.

I don’t personally have a financial advisor. The person I was referring to was someone hired by the hospital to give a lecture on our retirement plan. The lecture was geared toward full time employees, so when I asked about my particular situation she didn’t seem to know the answer. She also told me that I couldn’t have multiple 401Ks!
Thanks for your quick reply. Very helpful and definitely appreciated!

1. Part time W-2 employed physician with access to a 401k = $18,000
2. 1099 independent contractor with CompHealth. Plan to open SEP IRA = up to $54,000
3. Telemedicine consults with various platforms. Plan to open SEP IRA = up to $54,000

Does the above make sense? Since CompHealth and Telemedicine work are “unrelated” business/companies, can I have “employer contributions” to two separate SEP IRAs up to allowable max, up to $126,000 tax deferred?

Can/should I do two solo 401k instead of SEP IRAs and do only “employer contributions” up to allowable limit and then do a $5500 back door Roth IRA?

I am a W2 employee, with access to max 401a (~21,600k all from employer, 8% contribution from salary up to 270k salary), 403b (all pre-tax from salary up to 18k), and 457b non-governmental deferred compensation up to 18k. I plan on doing other other usual things, backdoor Roth, HSA, post-tax investments.

Question is, do I qualify for any other tax privileged accounts if I pick up a second hobby part-time job in which I am not over 50% the owner?

Thanks so much in advance, reading through comments and post, it sounds like my question should be answered, but some of this is going over my head, just wanted some thoughts, thanks!

I have a question about the qualifier above – ‘20% of earnings up to 36K’. in the above reply from WCI. Why 20%. I thought as the employee you could contribute almost all your self employment earnings to the solo 401K – minus self employment tax- up the the 54K limit. Isn’t the 20% of earned income the limit only for the Employer contribution to the solo 401K plan?

A separate question about employer sponsored 457B plans and employee contributions to those plans are treated like 403b plans or like 401k plans for the purposes of the $54K limit for total contributions including the solo 401k?

How is Example #4 not a brother-sister controlled group? The physician works as a physician in a partnership with less than 5 owners and as an IC with 1 owner.

IRS: A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest of each group and have “effective control”

That’s correct. If they have the same owners controlling 100% of both entities this is a controlled group, so if they want to have a separate retirement plan for the 2nd entity, the staff in the first entity should also be included in any retirement plan they set up. In short, they should consider doing a 401k plan with profit sharing for the 1st entity (if demographics allows it), and they should not set up any plans for the 2nd entity (because having a plan for the 2nd entity which excludes the staff in the first entity would most likely not pass testing). If the partner for the second entity was different from the partner for the 1st entity, then the partner that has 50% of each entity could set up a separate retirement plan for the 2nd entity without any regard for the plan in the 1st entity.

I have read all the comments. A trove of information. But I have a challenge I haven’t read much about. Our small practice abandoned our 401k as being too expensive. In 2017 we have a Simple IRA which I will contribute 12.5k and have matched 12.5 for a total of 25k. I am a 24.5 % owner. I have hospital compensation for non patient care activities of another 50k and my wife has about 50k in independent contractor earnings as an ophthalmologist. Can I do a i401k and add 5500 as employee contribution(now totaling 18k employee from IRA and 401k)and any extra from my IC activities to the employer side of the 401? Unfortunately I think I lose my backdoor roth as the Simple Ira rules states it has to stay for 2 years prior to rolling it over to my 401k? My wife can do her own 401k and backdoor roth. Any other suggestions? I’m getting crushed in my main practice with taxes. Our joint return effective rate was 35.7%.

Not all TPAs know how to minimize your employer profit sharing contribution while maximizing your own, so I would recommend doing a design study to determine whether a 401k would be better vs. a SIMPLE. We always do this prior to making a decision, and yes, it sometimes turns out that unfavorable demographics makes SIMPLE preferable, but only after we’ve tried various designs and are sure that the cost does not justify the benefit. Given your higher brackets, a 401k is a lot cleaner with backdoor Roth as you note (you’ll always have pro-rata issues with SIMPLE). And cost-wise, you can get a very low cost 401k plan (with low cost Vanguard funds) without any asset-based fees taken out of your account, so that’s not very difficult at all. With 4 partners, cost is split 4 way, so that’s an added bonus.

You can indeed do a solo 401k with a SIMPLE (since you own less than 50% of the practice), but your salary deferral is in common with the SIMPLE IRA (so $18k total for salary deferral to 401k plus SIMPLE). With a SIMPLE you can still make a non-deductible IRA contribution, and you can convert it when SIMPLE is rolled into a 401k plan.

Too expensive in terms of employer contributions. Helpful link, thank you. And to clarify for me when you say “non deductible IRA contribution and convert it when the Simple is rolled over” you are referring to a roth conversion? Do you agree I need to wait 2 years for the roll over?

If you have a large staff who are older and four younger partners, this can be a problem. This happens with larger practices when you have maybe 8-10 staff per partner. So the first step is to do a thorough design study because you need to know for sure that you can’t get a design to work for your practice. Sometimes with creative design approach you can decrease employer contribution significantly. This just takes a bit of work that few TPAs are willing to do.

And the next step is to actually calculate what ‘expensive’ means. All of the employer contribution is tax-deductible as a business expense at the highest marginal brackets, so when you actually use the best possible design and compare to the alternative (say 401k vs. SIMPLE) only then you can be sure that a SIMPLE is better (and the above article explains how I typically do this type of analysis). A big part of this is the fact that any money not contributed to a tax-deferred account is taxed, so doing the right analysis to compare apples to apples is key to determine which plan is better for your practice.

Hardly anyone does this analysis, but given that many practices set up a SIMPLE because they don’t have the right design for the 401k or set up a 401k without realizing that it might cost them too much and a SIMPLE would be a better alternative, I think that this should be the first step in making an informed decision.

Hi,
This is my situation.
I’m currently employed in a state facility that offers a pension. I contribute 6.8% of my salary that is matched by the state. They also allows after tax contribution up to 53K. Will this affect my limit my 20% employer contribution when I open my solo 401K?
Thank you very much!

A list? I’m working on finding one. And to have that one actually be wanting to advertise on the site represents another barrier. I’d love to have a list of 100 of these as I get asked several times a week for CPA referrals and most people want a local one!

I was hoping you could help clarify my situation. I currently have both a w2 part time gig, and work as an IC with a solo 401k. Through my w2, I have deferred 18k as my employee contribution. Through my S corp, I plan to have net profits of ~$250k and distributions of $100k. I plan to contribute ~$53k as employer contribution/profit sharing. My accountant has advised me that my employer contribution would be based on my distributions and not my w2 income from my scorp.

My wife is also an employee of my S corp, and I plan to defer 18 k of her salary as employee contribution, as well as match her 25% contribution at the end of the year. Could you please shed some light? Thanks.

I think you misunderstood the accountant or he doesn’t understand how it works. The employer contribution can be no larger than 25% of your S Corp wages. Your distributions don’t count toward the total on which your 401(k) contributions are based. So if you only make $250K, and you call $100K of it distribution, no way can you put $53K in there. It’ll be around $37K.

Currently:
401k – job 1 is maxed out, they match 3% then fill up to 53k
HSA – maxed out
529 – Vanguard 529, place 1 k per month for unborn under my wife's name and will eventually transfer
Term life insurance, job specific disability
Holding onto some cash for when the market plummets to buy property

Plan:
What should be my next steps for retirement savings? Can I set up another 401k through my pllc, or am I not able to since I am maxed at 53k? If I can, how do I create another 401k? Or should I do an IRA and roll into a backdoor Roth? Are there any other investment accounts I'm not thinking of?

Hi Just posted some questions on SEP vs. solo 401K, then I read this post. So here are my questions, how many 401Ks /sep can I have in my situation as follows?;

I have my own private practice nephrology group (sole owner at this time)which pay me W2 and full profit sharing to max 53K.
I also have 1099 Job with DaVita Dialysis centers, as a medical director. currently I have SEP for this
I also have some ownership in those dialysis centers via a LLC, which will start earning K1. Can I hire spouse and set up solo 401K for him? I dont think I can do anything for me with this income.

If your K1 income is passive, then you can’t open a retirement plan for that entity and you can’t use this income for retirement plan purposes. Also, it is not clear what you mean by private practice nephrology group. Is this a solo practice or a group practice? Do you own an entity under the group practice or do you own an actual group practice?

You can have a 401k and a Cash Balance for your private practice. You can also have a 401k and a Cash Balance for your income from your 1099 job. This would be plenty enough options, and you can definitely employ your spouse in either one of those entities (your practice or your 1099 job) depending on the facts and numbers.

I wouldn’t use a SEP, and instead I would recommend a solo 401k. Depending on the level of income, a solo 401k would allow you to add a Cash Balance plan if your income level is high enough (and consistent enough) to warrant this (you can’t have a CB plan with a SEP). Also, SEP would not allow you to do backdoor Roth, which is another tool to build up your Roth bucket.

Your businesses are all related, so you only get one 401(k)/SEP-IRA $54K contribution limit, plus if your nephrology group has employees you have to consider all of the ramifications of that. If you hire your spouse, he can use the 401(k) you offer your other employees.

I was confused by the ‘solo’ owner of a group practice. I assumed that means a partner, but I guess I was wrong. I’ve clarified my response below, you are exactly right. Sounds to me like a voluntary compliance filing is on the horizon and amended tax returns.

In this case I would consider doing a combo 401k/Cash Balance plan for the group practice, if that’s financially feasible given the staff demographics, especially if there is already a 401k plan in place. That’s the only way to increase tax deferrals.

It may be possible to have some of the income from 1099 work go into the practice entity to boost the income (if that’s necessary for Cash Balance plan purposes), but that’s something to be discussed with the CPA.

Just to clarify, if you are part of a group practice, you can indeed have a 2nd set of retirement plans for your 1099 income IF you don’t own more than 50% of the practice. If you own 100% of the practice and 100% of your 1099 entity, then you can only have a single $54k limit.

That’s why I asked about the group practice. Often group practices are set up with partners having separate LLC/S corp entities, but if you have a partnership, then your ownership % matters. If you do indeed own 100% of your practice, then you can not have separate retirement plan for your 1099 entity because you would then have a controlled group, which means you have a single $54k limit and while you can have multiple plans, they would be subject to a single limit.

So first thing to do is to verify facts and to make sure that you were allowed to open a SEP. If not, you would need to close it and remove all money deposited in it (as well as to do voluntary compliance filing).

CPAs and the majority of financial advisers don’t know very much about retirement plans. Retirement plans are rather complex, and controlled/affiliated groups are even more complex. For retirement plans you need to consult with advisers who specialize in retirement plans. There is no way to know what you can and can’t do without doing a thorough analysis of your situation. I can take a look at your situation and help you decide on what your options are. If there is something I don’t know or if I can’t make a decision because the situation is beyond my grasp, I have access to TPAs and ERISA attorneys who know all the answers.

Great article. Quick question:
I recently opened a solo 401K with vanguard. Then realized they don’t take roll-overs from prior employer based 401K. They do take roll-overs from other solo 401K plans. If I open a second solo 401K, say with fidelity, roll over my former employer based 401K plan, and then roll everything to vanguard, is this legal? I read that it was not possible to hold two solo 401K plans at the same time. Thanks!

I’m a 1099-compensated physician with no employees who just relocated to Nevada after having spent the first six months of the year practicing in California for the previous three years. I was structured as a sole proprietorship in California with a Solo 401K that I first opened in 2015. I have since formed a PLLC (to be taxed as an S-Corp) under a different EIN here in Nevada. I am looking to open a new Solo 401K for the PLLC. I don’t anticipate generating enough from either my sole prop nor my PLLC individually to make the maximum 54k contribution for 2017, but I should comfortably have enough income to do so if I could contribute to both Solo 401k plans this year. I understand that I am the same owner of two businesses doing more or less the same thing, but the work was performed in different states under different EINs. In this situation, am I allowed to contribute to both Solo 401k plans in the same year, as long as I don’t exceed the 54k maximum? Am I required to roll over the first Solo 401k into the second one within a certain span of time?

I am a 50+ year old physician, who retired from the military and then started working for a medical group. I ended up having some medical issues so was not working for approx. 1.5 years and then started doing various medical consulting jobs from home this year as an independent contractor and have set up a solo 401K
I understand I can put 100% of income up to 24,000 directly into the 401k, but what if I make less than 24,000 the first year. Is the max I can contribute to the solo 401K determined by my Earned Income minus 1/2 what I owe in self-employment tax?

If I start making over 24,000 I can than take 25% of all income over the 24,000, minus 1/2 self employment tax and also put that to the solo 401k up to 59,000, is that correct?

I am also going to start work part-time as a employed physician at a federally run clinic and they have a 457b so I understand I can also defer 18,000 of this income a year and it will not affect the amount I can contribute to the 401k.

I had done a back door Roth IRA in the past, and at the time I did not have any other IRAs (I had a 403b/TSP military account), so the conversion was fairly simply. But when I left my last employer, they said I had to move my 401K or pay the fees which were high, so I had rolled it into a regular IRA. Can I now roll that money which is in a regular IRA into my solo401K, so that if I decide to do a back door I IRA again, I don’t have any money in any other IRAs?

Lastly, as an independent contractor, who’s work is intermittent and irregular I decided it was easier to simply pay more Federal and state taxes out of my monthly retirement income, rather than trying to project what my quarterly self-employment taxes would be . I’m probably over paying the taxes slightly, but I think it would be easier that way. Is there any issue doing this? Or do you have a better suggestion?

I think it’s a $60K max this year for 50+, no? $54K + $6K? Perhaps the easiest way to do it is to let tax software calculate out your maximum contribution. So put in a bunch now and then at tax time, top it off. But yea, you’ve got the basic formula down. One thing to keep in mind though is as a sole proprietor, its 20%, not 25%. I know the IRS paperwork says 25%, but they mean 20%. It’s 25% of what’s left AFTER the contribution, which is really 20%.

The 457 limit is separate from the 401(k)/403(b) limits. Kind of weird that that clinic would offer just a 457 and no 403(b) or 401(k). Better look at that more closely. You might be able to have two 401(k)s plus the 457.

Yes, you can roll that IRA into either the solo 401(k) or the TSP to eliminate the pro-rata issue with your backdoor Roth IRAs.

So to summarize, since I use I use turbo tax premier and did not see any calculators to determine how to make these calculations:

If this year, since I just started working in March, I only make 15,000 as an independent contractor I can put in 13,852.50 [15,000 minus 1447.5 (1/2 15.3%)] into a solo 401k.

And if I start working as a part-time employee at another medical group I can put up to 18,000 in there 457b (they are making a special exception and allowing me to contribute to the 457b since I am working less than 10 hours a week, and no other retirement plans are available for my work for them).

In the future if make more as an independent contractor I can put in 24,000 of my earnings into the 401K as long as I make 25836 (24,000 +.0765), than I can also put in 20% of my earning beyond that up to 60,000.

Lastly my 401K from my prior job that I rolled over into a regular IRA this past year, I can now roll over to my solo 401K.

Job 1: Group practice of which I am 1/3 owner. Receive $59K for 401K total
Job 2: Directorship paid by hospital by 1099. Total salary $60K. Can I open a solo 401K for this job and how much can I contribute? Do I need an LLC or EIN for this?
I also do $6500 backdoor roth

You don’t need an LLC, but most individual (solo) 401(k) providers do require an EIN to open one.

I guess the question is whether these two businesses are in a controlled group or not. I think since you own 100% of one and only 33% of another that they are not, so you should be able to have another 401(k). Remember only one $24K employee contribution no matter how many 401(k)s.

Thanks for this really helpful article. I tried to search through the comments & forum and didn’t see my question answered; apologies if I missed it.

My wife & I are both physicians working as locum tenens. We are both sole proprietors right now, have not set up any corporation. We currently have the same agency & hospital clients, but that will change later this year.

I’m thinking of us as separate proprietorships. Does that mean we can both have solo 401k’s? Or should we think of this as one shared business that we own 50-50 and therefore we can only have one solo 401k?

Basically, in the case of a controlled group you would most likely have to file the full form 5500, not the 5500 EZ, and you can file a single form for both plans, so you can indeed have two separate plans. I know that custodians would not file the full form 5500, so in the case of a controlled group you might want to find someone who can fill this form out for you, maybe your CPA can do it.

Sorry if the above is a bit confusing, this is just how things are with these convoluted rules.

Depending on which state you are in, two separate entities/proprietorships can still be a controlled group (through marriage attribution in a community property state or via marriage/children in a non-community property state), but each of you have a single $54k limit, so this does not change whether you open a single plan or two different ones. With a controlled group you can open one plan or two plans, and with two separate proprietorships that are not a controlled group you can also open a single plan or two plans.

The only difference is that with a controlled group both plans are tested together (though without employees there isn’t any testing), so you might as well just open a single solo 401k plan, though you most likely can not do that with a ‘stock’ solo 401k, and this would require a custom plan document. You can open a single plan even if you don’t have a controlled group, with two adopting employers (and pool your investments), but this again would require a TPA and a custom plan document. So first thing, you need to find out whether you have a controlled group or not (and whether you are in danger of creating one, say via children). You can open two separate plans, but I’m not sure what type of reporting would be necessary in the case of a controlled group with two solo 401k plans (I know this is reported on the form 5500 for ‘regular’ 401k plans), you might have to ask the custodian prior to opening an account.

What if my employer pays me as an employee (401k with match) at some hospitals and with a 1099 as an independent contractor at others? Can I take advantage of this still and open a solo 401k for the 1099 income? I also receive a significantly smaller sum for some IC consulting that I do, how would that fit in? Thank you so much! Avid reader of your book and have given it as a gift to many recent grads.

Your newest post referenced this one, and as such I’m glad I clicked over. If i’m leaving tax deferred investment on the table, I would like ot fix that ASAP 🙂

Im a part of a democratic group practice that issues a K-1 for partners ($300k), with contributions to a 401K plan ($53k) and Defined Benefits plan ($30k). I do some other work on the side through my own LLC and thus get 1099 ($35k), I have some real estate investment properties that have leased out and get a revenue through a separate LLC ($46k). I am single, so no spouse income. I contribute to backdoor Roth ($5.5k) and HSA ($6.6k). So a total of 53 + 30 + 5.5 + 6.6 = 95.1k contributions.

Does this still mean I can contribute another $53k to an individual 401k? If so, what is the process of starting my own 401k — would I just go to Vanguard / Schwab where I have other accounts and open one? Is the designation I’m looking to open an Individual or Solo 401k?

Also in your example #2 (which seems closest to my situation) you indicated that from your partnership 401k that $18K can be Roth. How do you designate that?

Yes yes, same group 🙂
Thanks for the clarifications. $7k tax deferred is totally worth the effort! Also appreciate the E-trade rec and logistics. Just read your post on Bogleheads thread about that, and seems the Etrade account is indeed a good route. (https://www.bogleheads.org/forum/viewtopic.php?t=127182)

I own a Independent Pharmacy (S-corp) and max out my 401k through this. My wife is also an employee and max out her Roth 401k through the S-corp. We have 17 employees that have access to the same 401k.
We recently built a new building that my wife owns through an LLC. The S-Corp is paying rent to the LLC. Can we place any additional money in tax advantage accounts through the LLC?

Also, this is not earned income, so even if they weren’t related, you couldn’t do this. I’d be curious to find out what your employer contribution is with 17 employees. Unless they work less than 1000 hours I would imagine the cost of profit sharing would be huge. But if you are able to max out with high % to owner, then you might be able to add a Cash Balance plan and make an even higher contribution this way, provided that you are at least 40 years old (older is better).

There are different ways to optimize profit sharing contribution. For one thing, you can probably exclude half of your employees from the profit sharing, but it does get tricky. You are way too young for a Cash Balance plan, I’d wait to try it. Depending on the demographics things may or may not work out on the 401k side, but you’ll definitely need some creative design work (and there is no guarantee that this can help you put away $54k). Usually with a CB plan your % to owner will increase, but not always.

The most important part of this analysis is to understand what % to owner is going to be acceptable vs. just doing after-tax (since that’s the only thing you have aside from backdoor Roth and your 401k with the match). Just because your profit sharing contribution is high does not mean that this is automatically bad – there is a breakeven point, and for those in the higher brackets tax deferred is definitely more advantageous than for those in the lower brackets.

Question on Rule #7 and I apologize if this in the comments but I can’t read 580 comments when the information is this dense…
I am an employed doc with a 403b and have a separate IC position for which I am self-employed (just me, 100% ownership). You mention that the 403b limits me, but I was unsure if that means I cannot open an Individual 401k at all because of it being a controlled group or can still open one but my max is only $35K ($53K-18K). Can you clarify if being a 403b employed doc limits my ability to open an Individual 401K at all through a separate entity as a 1099 IC or just limits total contribution amounts through my side IC job?
Thanks

WCI,
Wisconsin Retirement System allows you to contribute after tax dollars with a limit of 54,000. I also opened a solo 401K. My accountant said that my employee and employer contribution for my 401K and the after tax contribution that I’m planning to contribute to Wisconsin Retirement System should not exceed 54,000. Can this be a case of two separate employers and I can use two 54,000 limit.
Thanks!!!

I’m not familiar with the Wisconsin retirement system. It’s also not clear if you have self-employment income. But if you have two unrelated employers (even if one is you), you should get two $54K limits. Many accountants have been wrong on this point.

WCI,
Per your advise here, I opened a solo 401K at ETrade (Also received 1,000 dollars rewards) for my Hospitalist Income as a side job. I earned 60,000 dollars this year.
I’m also employed by the state of Wisconsin that allows 54,000 after tax additional contribution.
Here is the statement that I found in their documentation.https://www.evernote.com/l/ADaAnFYQKYdMfpVakiyzFGtKF5knASjG_gwB/image.png

It states that “Certain WRS additional contributions are subject to annual limits as imposed by federal tax law in IRC Section 415(c). In 2016, you may contribute 100% of your gross compensation for the calendar year, up to $53,000. This limit may increase in future years.”

That’s right, if you have a 403b plan, and you also have a solo 401k plan, your total contribution into BOTH plans is limited to $54k. This rule simply makes no sense, but it is on the books so just make sure that your total contribution is $54k or less.

Thanks for this post, WCI! I realize it’s a bit dated, but it was just cited on reddit today, so this is the first time I’ve come across it. It’s timely for me, to help guide the research I need to do in hopes of adding some 401(k) income for myself and/or Mrs. Vigilante as soon as possible. Bookmarked!

Sorry if this has already been answered previously in the comments section, as I’m trying to read them all but getting overwhelmed. Here’s my situation

Job #1 – employed by megacorp on a w2 making 300k and maxing out their 401k plan for the year at 54k

Job #2 – 1099 income from nursing home medical directorship, hospice certification/recertifications, nursing home rounding (about 20k total each year)

Job #3 – This is the tricky part. My husband is in private practice with 4 employees and they have a 401k with the practice. He wants to pay me approx 100k via 1099 for covering for him when he is out of town from his practice, seeing his overbooked patients, following up labs etc. He would like to do this rather than make me another w2 employee of his practice. Is this feasible since we are married? And if he pays me 1099 contract pay, does that allow me to have a solo 401k? Even if he does not give me 1099 income, can I have a solo 401k for my Job #2 or would it be considered related/controlled via marriage by his company? The easiest answer seems to be to make me a w2 employee and add me to their 401k/PSP, but then I would not be eligible for the plan until after 1 full year of service with the company.

There are two factors to consider with respect to marriage: kids, which attribute control to each spouse, and community property state (which attributes control without kids). In either case we got a controlled group. If the demographics for the practice are challenging, the solo 401k might not pass the combined test and it might not even work well with the practice plan given that they have different plan docs, so in this case a single plan is always better vs. having separate plans (and a single plan document is still better to keep the costs down and to make sure both plans follow the same rules).

Tell me about that, I’ve been collecting this stuff since the start of this entire thread. I see all types of variants on this. Leased employees is another area where I see lots of mistakes, and it can get very costly for a practice if they are not following the rules.

I’m sure there are plenty of docs and spouses violating the controlled group rules as far as solo 401k plans. Affiliated group rules is another area where things get dicey. You can easily avoid controlled group rules in some cases, but if affiliated group rules kick in, then you got a controlled group just the same.

First thing to note, you most likely have a controlled group, so I would forget doing a solo 401k for your 1099 income (especially if you have children or if you live in a community property state).

So because of that, paying you a 1099 won’t be of much benefit since you can’t have a separate solo 401k anyhow without things getting really complicated with respect to your husband’s retirement plan (both plans have to be tested together, which is not something that you want to do because you might never pass the tests if you maximize your contribution into the solo 401k plan.

However, if you get a W2 from your husband’s practice, you can contribute into his plan, again, subject to testing (this time it will be for a single plan, so that’s preferable in terms of lower complexity and better oversight by the TPA). The only issue that I see is that if you are making salary deferral into the other plan, maxing out with profit sharing only can be difficult. You might want to consider contributing just the match for your other job, and contributing the rest into your husband’s plan. This assumes of course that he has low cost index funds and no AUM fees of any type in his plan, which would make it more preferable to contribute money into his plan vs. into your other W2 plan. Also, you do want to get an illustration from the TPA to make sure that this is cost effective since your husband will be paying payroll taxes on that $100k in W2, so there is a tradeoff here in terms of setting your W2 to get the biggest bang for the buck. Also, the W2 has to be fair according to IRS standards considering that you have another full time job.

Wow, thanks for your insight. We are both in our early 30’s and he had the practice up and running before we got married, but I have only just recently started working as an attending. So in Texas, any business I own/start is 50% his, which makes it a controlled group situation. So no solo 401K for me =/. As far as practice demographics, his current employees are non highly compensated and range from late 20’s to early 30’s in age, and have about 1-2 years of service for him. Does this make our demographic “difficult” if we are adding me as a highly compensated employee?

In regards to payroll taxes, if I have already maxed out my SS taxes from Job #1, does he still pay the employer portion of it when he pays me? And do I pay a new set of SS taxes when I work for him?

Yes, just the employer portion for the payroll tax, no more for you as an individual. Texas is a community property state, so right off the bat you got a controlled group via marriage attribution.

The #1 concern is whether the W2 you are getting is fair based on a job description you’ll have with the practice, so that’s something to consider. Also, you have to be careful about the part-timer exclusion in the plan document. If you work less than 1000 hours a year, you can’t join this plan unless you open it to all part-timers who work less than 1000 hours. Also, you can have a special entry date without having to wait 1 year, but again you’ll let others who haven’t met the 1 year requirement.

As far as demographics, short of doing an illustration it is difficult to predict what can happen. What we typically do is a design study with various salaries and other options just to see what the best design would be given a specific scenario with the goal of maximizing your contribution and minimizing employer contribution. This has to be done every time there are changes made to the plan (such as when staff is added/removed, etc). Your TPA should be able to assist with that.

I work as an independent contractor doing multiple misc. jobs (telederm, record reviews etc) which I will receive a 1099 and I expect I’ll receive approximately 20,000 this year.
Since it all profit other than minor costs (medical license, business certificate, MOC fees, CME which totals 459.25) I planned on contributing all my net profit (20,000-459.20=19,540.8) to my solo 401k – ½ SE tax (3060/2=1530) which would come to 18,010.75

I also work as a W-2 employee and I plan to contribute 18,000 to a 457b.
In addition, I want to put 6,500 of my after tax earnings into a traditional IRA then convert to a ROTH.

I believe I am able to contribute to each of the above plans, but I wasn’t 100% sure I was calculating correctly what I am allowed to contribute into my solo-401K. Can you confirm please?

*Obviously waiting to see what happens with PSLF. If PSLF falls through, I will scrap the above, refinance here on the site to a private company, continue to rent, contribute every penny to pay back loans, and pay it off in 1-2 years.

reads to me like $55000 is the limit for the total of all unrelated employers. Here is the relevant part:

“Compensation limit for contributions

Remember that annual contributions to all of your accounts – this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts – may not exceed the lesser of 100% of your compensation or $55,000 for 2018 ($54,000 for 2017). ”

Total annual contributions (annual additions) to all of your accounts in plans maintained by one employer (and any related employer) are limited. The limit applies to the total of:

elective deferrals (but not catch-up contributions)

employer matching contributions

employer nonelective contributions

allocations of forfeitures

Example 1: Greg, 46, is employed by an employer with a 401(k) plan, and he also works as an independent contractor for an unrelated business. Greg sets up a solo 401(k) plan for his independent contracting business. Greg contributes the maximum amount to his employer’s 401(k) plan for 2017, $18,000. Greg would also like to contribute the maximum amount to his solo 401(k) plan. He is not able to make further elective deferrals to his solo 401(k) plan because he has already contributed his personal maximum, $18,000. He has enough earned income from his business to contribute the overall maximum for the year, $54,000. Greg can make a nonelective contribution of $54,000 to his solo 401(k) plan. This $54,000 limit is not reduced by the elective deferrals Greg made under his employer’s plan because the limit on annual additions applies to each plan separately.

This website has been very helpful. Quick question WCI, I too have maximized my 401k at my work (18k employee contribution with 5% employee match, for a total of 29k invested). I also made about 70k from my contractor income and want to do a backdoor Roth for my wife and I. I think a solo401 would be best.

I spoke to my financial advisor and he said I needed to create an s cooperation in order to contribute the employer contribution (which will be nearly 11k). Do you know if that is correct?

That is INCORRECT. Get a new advisor. Why should you have to teach your financial advisor the rules? I don’t have a lot of patience for that sort of financial malpractice. If they don’t know something, just say so and look it up. Don’t make something up. I don’t expect advisors to know everything, but that’s not exactly an uncommon issue for doctors.

You need an EIN, but you can get that quickly for free from the IRS online. You only need to be a sole proprietor, not an S Corp.

Also, it’s not clear from your comment that you understand that a Backdoor Roth IRA and a solo 401(k) are separate things with their own contribution limits and you can do both.

You do need to open that solo 401(k) before the end of the year though, which might not be possible. One work around is to do a SEP-IRA for tax year 2017 (open in 2018 prior to April 15) and roll into your solo 401(k) in 2018) and a solo 401(k) for tax year 2018. You have until April 15 to fund Backdoor Roth IRAs for tax year 2017.

Thank you for this. Two quick questions. If I do Roth conversion in 2018, can it apply for the 2017 tax year? Second, can I do the Roth IRA backdoor and SEP-IRA simultaneously? I think not due to the pro-rata rule.

No, conversions are reported for the year they are done. Only contributions can be done for the prior year (if done prior to April 15 of the next year).

You can do a traditional IRA and a SEP-IRA contribution in the same year. But if you convert your traditional to Roth IRA and there is money in the SEP-IRA on 12/31 of that year, you’ll get “pro-rata-ed” on your 8606.

Gotcha. I understand now. So I could do the backdoor ROth IRA conversion this year and then do the SEP-IRA early next year to use for 2017 taxes and the later roll them over solo 401k to not get the pro rata rule.

I will graduate residency this year and am trying to educate myself with help from your book and this website and a physician mom’s finance group. I currently moonlight with 1099 income and plan to open a solo 401k. When I become an attending in July, I will max out the retirement plans offered. If I understand this article correctly I can have my hospital employer match my contribution at their max of $18k, max out my portion and then also place $53k in my solo 401k correct? What were the rules about the contribution not exceeding the compensation from the 1099 income though? Will I need to be making >$53,000 moonlighting in order to place $53,000 into a solo 401k? Thank you for all of your excellent advice!!

Yes, if you have enough income to hit the (note in 2018 it is higher) $55K limit, you could potentially get that into both plans.

Let’s say you make $200K at the main gig and $50K moonlighting and your employer offers a 100% match on the first $18,500. Then you could put in $18,500 into the employer 401(k), your employer would put in $18,500 for a total of $37K there. Plus you could put another $10K into an individual 401(k). So a total of $47K. If your employer gave you a larger match, you could put more into their plan. If you made more moonlighting, you could put more into your plan.

What I can’t seem to make sense of is if it’s possible to go beyond that limit. For example, in my current main job (K1) I have my 401k maxed. I have a side gig moonlighting paid into my PLLC, about 50k. Since this is a separate job, can it fund a separate 401k?

Yes, a separate job can fund a separate 401(k) with a separate $55K limit. But you must have enough side gig income to max that out (like $280K) because you only get one $18.5K employee contribution no matter how many 401(k)s/separate jobs you have.

Ok, so just to make sure I have this right:
Job A (K1), employee contribution is 18k, and employer distributions are filled to 55k
Job B (1099), no employee contribution since that was already maxed (right?). Employer contributions can be up to 25% of compensation. So if my PLLC pays me 40k, 10k can be placed into a small business individual 401k, for a total of 65k?

Part of my confusion is when I called vanguard small business 401k they informed me that you couldn’t go beyond the 55k limit

Yes.
Not quite. If the PLLC pays you $40K, you can put $8K in. It’s 25% not counting the contribution or 20% counting the contribution. If the PLLC only makes $40K total, you can only put $8K in. If the PLLC makes $50K, files taxes as an S Corp, and pays you a salary of $40K, you can put in $10K, i.e. 25% of what you were paid but 20% of what the PLLC made.

And since most people don’t have access to two 401(k)s, most advisors don’t even know you can use more than one. This post is a reference for many of them.

WCI: For your “Rule #2” as shown in this article, it’s understood/agreed that you can have multiple 401K plans. One from each business/employer and the profit-sharing limit of $55K (for 2018) is per 401K plan from each business/employer. However, I couldn’t find any text on IRS website or anywhere else stating multiple 401K plans from mutiple business are not allow if they are part of the controlled group? Please help confirm/verify this info or point to IRS codes/references regarding this.

I spoke with a representative from an employee benefit services company and was told differently. The rep said you’re allow to have multiple 401K plans from multiple businesses that you fully own (controlled group). This even applies if your “Company A” has employees and your “Company B” is only yourself (and spouse). However, the most important rule in this situation is the requirements to have “comparable” benefits/contribution-matching/profit-sharing between those 401K plans from each company.

I’ve been trying to confirm/verify this info. If what I’ve been told above is true, that is HUGE!!! Especially for high income business owners. A couple can potentially stuff away $110K per 401K plan at each one of their businesses. If they have 3 businesses with high enough income, that $330K tax deferred.

WCI is right and the rep is right, but they are both right about the same thing. Controlled group/affiliated service group rules ALWAYS apply, this is not the question.

WCI’s statement is inaccurate in one way. You can have multiple retirement plans in a controlled/affiliated service group, but you are still stuck with a single 415 limit. And while reps’ statement is partially correct, it is highly inaccurate. While you CAN have multiple retirement plans in a controlled group, they all have to be tested together, and ‘comparable’ is not going to cut it because the testing for multiple plans can get expensive, and you so is the administrative cost to have multiple plans that still fall under a single 415 limit. And you still have to cover the employees of a controlled group.

Bottom line is this: you can not avoid controlled/affiliated service group rules. If you own 50% or less of one business (with an unrelated/non-spouse partner), and 100% of another one you can have separate retirement plans with separate limits. If owner/spouse have separate businesses, they might form a controlled group via children/spousal attribution, and that would require both of their separate plans tested together, so they might as well form a single plan for the ‘group’, even if the businesses are unrelated.
This is why often an ERISA attorney is required to sort through various scenarios. I also often see docs trying to DIY through these rules making lots of potentially expensive mistakes along the way. Prior to doing something potentially wrong, always consult with someone who knows these rules well, and worst case, you might need to pay an ERISA attorney for a letter of opinion if you have an especially complex situation.

I think the rep from that firm is wrong, but I can see why you’re looking more carefully into it. Look, I’d love to be wrong on this, but it doesn’t pass the sniff test. Think about it. Why not split WCI into 5 different companies and open 5 different 401(k)s and put $280K into them? It doesn’t doesn’t make sense that that would be allowed.

You can do everything but the last bit: you can split WCI into 5 different companies and open 5 different 401k plans, but combined limit would still be $55k 😉

The pdf above provides guidelines for those who examine retirement plans, and controlled/affiliated service group rules come from ERISA and IRC, and it is an intersection of two, that’s why there is not a single IRS site that shows all of the regs.

The Backdoor Roth IRA and 457s don’t count toward the $55K limit. 401a, 403b, and 401ks do. So what you’ve done is fine. If you could do another 457, that would be more. You might be eligible for an HSA. You can always invest more in taxable. You could get a 1099 job and do an individual 401(k) with that income.

I am getting push back from my accountant on a second i401k contribution and would like some clarification/help

I am an anesthesiologist and opened a second i401k on some 1099 income I made through doing work for donor alliance at the main hospital I work at. My main income is through an anesthesia partnership, paid on a K1. Our business and billing dept has nothing to do with donor alliance, it is something you can choose to do on your own and some in the group do, most do not. (Organ procurement at 2am is not appealing.)

My accountant is saying if it is the same type of work, then I have already met my contribution limit. I said, no, they are not a controlled group, which is the distinction that matters. I don’t exactly know where to go form here but I was counting on that i401k as a landing spot for some other retirement accounts. I want to push this through if it is legal, but my accountant is giving me resistance. And billing me as I educate her, which is annoying! Please advise. Thank you

Not sure what you’re saying. Do you have two individual 401(k)s? If so, I agree with your accountant. If not and you just have one 401(k) from your partnership and the i401(k) for the business you own, then it sounds like you need a new accountant. The controlled group is the distinction that matters.

The facts are not very clear. Sounds like you have a partnership that pays K1 and that has a 401k plan. This is not an I401k, this is a 401k plan and you probably have an individual brokerage account, but this is not an I401k.

If you do work for the same hospital for which the partnership works, then that’s where things get a bit murky. There may not be a controlled group, but there can be an affiliated service group which results in the same thing – a single plan limit. However, determining this is really tricky and facts do matter.

Superficially, if you don’t use the same staff/offices/equipment, and the only thing in common is that the hospital pays the partnership, and also pays you for 1099 work, I can’t find a reason to think that this is an affiliated service group (unless the hospital owns part of the practice). And of course I’m assuming that you own 50% or less of the partnership interest. If that’s the case, I see no reason why you can’t have another 401k plan for 1099 income, but I might be missing something, so your accountant is just being very conservative (so I don’t blame him or her) – I often have to consult an ERISA attorney as such matters do get rather complex and it is better to do it right the first time to avoid potential penalties and fines.

Another alternative is to set up a Cash Balance plan for the partnership if more tax deferred space is needed. Whether a plan will work for your practice depends on the interest of the partners and the contribution into a Cash Balance plan is limited for those who are under 35.

fact 1 – my main job is a partnership for which I get a K1 distribution and have a 401k which I have maxed at 54.
fact 2 – I made additional income by working for donor alliance, for which they pay me $1000 per organ procurement, which is, yes, in the same hospital where I do most of my anesthesia practice. I bill them myself, use my home as my address, my SS#, recently got an EIN, created an i401k for this income (but have not yet funded it.)
Fact 3 – my main practice (K1) does receive a small stipend from the hospital but most of our revenue is from our own billing.
Fact 4 – we do actually have a cash balance plan, which is great. I need the i401k as a landing spot for other retirement money, not really for extra retirement space. (I dont want to roll to IRA because I do a Back door Roth IRA)
Fact 5 – hospital owns no part of either business.

I have explained all this to my accountant and she is actually on board now. Thanks for all the feedback. And thanks WCI for educating me to such a level where I even have such problems!

I am new to this blog and came across it by accident while doing some personal finance research. Candidly, I am very interested in this topic and your advice sounds extremely valuable, but all of this is new to me and way over my head. My situation is below – any advice or reassurement is most appreciated. I currently only max out 401k employee contributions and nothing else.

–Primary Job:
Hospital work where I am paid solely W-2 income and offers a 401k (where I currently max out employee contributions and receive a 4% employer match)

–IC work where I receive only 1099 income (only approximately $25,000/year)

–Partnership 1 where I receive K-1 income (only approximately $25,000/year)

–Partnership 2 where I receive K-1 income (only approximately $25,000/year)

Welcome! It’s no accident you found your way here. I work very hard to be found by people like you!

First, it’s a $55K max for 2018.

Second, assuming these are all unrelated employers, I suspect you could have four total 401(k)s, all with a $55K limit. Of course, you don’t make enough at most of those jobs to max it out and it doesn’t sound like your hospital 401(k) will get to $55K either. You also don’t mention whether those partnerships offer a 401(k), so I’m guessing they don’t.

So it’ll probably look something like this:

Primary Job: $18.5K + 4% match
Your business (1099): Open an individual 401(k) and get ~ $5K into it

You can talk to the partnerships, assuming that is earned income, and see if they want to start 401(k)s. But it has to be offered to all the partners and the employees

Whoa!. Wait a second. Looking at the last few posts, I thought the max of any 401k elective contribution was $18.5k (fro 2018), regardless of how many 401k/403(b) one had, whether controlled groups or not. When did this change? From theses posts it sound like I can have 2 different jobs at 2 different medical groups/hospitals, unrelated to each other and I can put $18.5k on each?,…, Plus have 2 separate 457(b) with $18.5k each,… Plus do some IC work on the side (telemedicine) and open a i401k and put another $18.5k elective deferral PLUS 20% net Profit as Employer contribution? Is this right? I can shelter $92.5K or more?
Please clarify.
Thanks

No. You get one $18.5K (if under 50) employee contribution no matter how many 401(k)s. But the total for each 401(k) at an unrelated employer of the employee and employer contribution is $55K (if under 50). So typically you use the employee contribution at the main job and just employer contributions for your side gig.

457s have totally separate limits.

So the only thing you have wrong is the second and third $18.5K employee contributions. Can’t do that. But if you put in $18.5K into your main gig and maybe your employer gave you a $10K match. Then you made $50K at your side gig and put 20% of that in an i401(k) as an employer contribution. Total $38.5K in that scenario.

Question. I am an employed physician with 18.5 401k and employer match. My wife and I have a LLC for two rental properties where our 1099 income was about 35k for 2017. How much of that 1099 income can I invest into 401ks for either my wife and/or I?

Questions:
1) Does the 457b plan count against the annual per-employer overall contribution limit ($55000 in 2018)?
2) Assuming the answer to 1) is yes, then her contributions total $52750 (18500 + 18500 + 7350 + 8400). Does this mean she would only be able to execute a not-so-mega backdoor Roth of $2250 via her Defined Contribution plan?
3) If she does do a not-so-mega backdoor Roth, would she be able to still execute a $5500 regular backdoor Roth via non-deductible Traditional IRA contributions?

Ask Congress/the IRS. It’s their rule, I’m just telling you what it is. 457s are in a different category.

Depends on the plan and its rules as well as her income. But assuming the plan allows it and she has enough income to justify the contribution, I believe the total contributions to the 403b and the defined contribution plan by employee and employer cannot be more than $55K if under 50. So b.

One situation where I am still confused is the rules regarding multiple 403(b) accounts with separate employers (separate hospital and university employers each paid on separate W2 and not owned by the same controlling entity). The control rule “rule #7” above regarding 415c limit all hinges on 403(b) considered to be controlled by the employee, which suggests to me that all 403(b) would be controlled by the same employee and thus subject to a single 55,000 limit on annual additions.

However from IRS publication on 403b IRS publication 571 403(b) plans, Chapter 3 (Limit on Annual Additions) “If you contributed to more than one 403(b) account, you must combine the contributions made to all 403(b) accounts maintained by your employer. If you participate in more than one 403(b) plan maintained by different employers, you don’t need to aggregate for annual addition limits.”
Thus the IRS publication seems to say with a two employer, two 403(b) situation the limit is not aggregate and would be 55,000 for each employer (total of 110,000)

I would interpret the IRS publication to mean the following would be allowable for 2018:
18,500 employee contribution “Elective deferral” to 403(b) at employer A
6,000 employer match “Nonelective contribution” to 403(b) at employer A
30,500 After-tax contribution to 403(b) at employer A (for mega backdoor Roth)
55,000 After-tax contribution to 403(b) at employer B (for mega backdoor Roth)
18,000 deferral to 457 for employer B
= 128,000 (55K for each employer plus additional 18K for 457)

Do you agree that with separate employers that each have 403(b) accounts, the annual addition limits would not be aggregated and thus allow for multiple annual addition limits (but of course still a single 18,500 elective deferral limit)?

WCI, I’m glad to have found this site. There is so much useful information on a variety of topics, I can’t thank you enough.

Could you clarify a point of confusion for me regarding multiple 401k’s. I was formerly in a group practice but now work part-time and receive 1099 income. When I left I rolled over my 401k retirement plan into an IRA at Fidelity. SInce this caused the pro-rata rule to kick in when I do my back door Roth IRA, I obtained an EIN and transferred my rollover IRA into a Fidelity solo 401k. Other than this rollover, I have not contributed further to this account due to RMD concerns when I turn 70.5 years.

Three years ago, I learned about the existence of Roth 401k’s. To take advantage of this, I sought to open a solo Roth 401k. Unfortunately, many firms including Fidelity do not offer this. T Rowe Price does allow solo Roth 401k accounts so I opened one there using the same EIN and have contributed the employee portion every year.

From the information in your post, it seems to me that this is OK as long as I don’t exceed the IRS yearly contribution limits. However, on an unrelated question I posted in the forum, I did discuss these two separate accounts. One of the replies suggested this is a “401k plan error” and I should have closed the Fidelity account and opened the T Rowe Price account with an amended adoption agreement. I’m confused, your thoughts on the matter?

I have a 403B plan from a previous employer that has limited options. I also have a Vanguard individual 401K for 1099 income. Until reading this last post it had not occurred to me that I might be able to roll over the 403B into my individual 401K. I thought I could only roll this over to an IRA ( which I am avoiding because I want to continue making backdoor Roth IRA rollovers), or a current employer 401K or 403B. Do I have this option to roll over my old company’s 403B into my Vanguard individual 401K. And if so can I roll over both Roth and pretax components of my old company’s 403B?

Hi, your site is fantastic! I left a job last year and have about $200k in a 401k with high fees. I started an S-Corp last year and opened an individual 401k through Vanguard. Rolled over a small portion of the old 401k into my Vanguard roth, but don’t want to pay taxes on the rest. Thinking about opening up an e-trade or Schwab i401k to rollover the rest of the old 401k into. I already contributed to my Vanguard i401k in January. Do I have to wait until next year to open the other i401k? Or can I open it and just do the rollover, but only contribute for 2018 to the Vanguard one? Thanks for your help!

Probably better wait until next year. I don’t know that it is necessarily illegal to open another one this year, but it sure would make things more complicated than they need to be. If you don’t mind that complication, go ahead, but it seems to me that opening another 401(k) in the same year you contributed to another one might raise some eyebrows at the IRS.

I think I would just open an etrade one next January and roll both 401(k)s in there and start making my contributions there.

Hi – love your site!! I have a question involving switcing employers mid year and potential 401k tax consequences. Right now I have my 401k set to 50% pre-tax contribution (which automatically switches to after-tax, after 18.5k). My employer kicks in 2% regardless of employee contribution and additional dollar for dollar match up to 4%. I’m projecting to max out (due to March bonus) my 415 limit (55k) in April/May timeframe, after which my employer will keeping contributing the 6% match into a deferred income account.

If I leave this company (for example on July 1st or later) and get a new job with a completely separate, unrelated company and start contributing to their 401k plan (which has a dollar for dollar match up to 4%)… I have a couple of questions here:

1. After reading another question on your site, it sounds like I don’t have any issues with exceeding the 415 limit, because the two companies are completely unrelated. Is that correct?
2. If I want to take advantage of the new company’s 4% match and they only have a pretax contribution option, then I’ll obviously being exceeding the annual 18.5k elective contribution. Question: can I choose my ex-employer’s 401k plan to square up with on the excess contributions (over 18.5k) or does it have to be with the new company since it is my current company and more recent? Also any thoughts on if my ex-employer would disqualify me for any of the 6% match that was funded into the income deferral plan?
3. If the new employer offers after-tax contributions and I go that route, I’m thinking it should be smooth sailing because I wouldn’t be exceeding my 18.5k annual pretax limit and since the 415 limit (I think) is separate for each company, I won’t be exceeding that either and last I don’t believe I can exceed annual after-tax contributions, as long as with each employer, I don’t exceed the individual 415 limits. Am I thinking correctly here?

Primary business is my solo LLC medical practice with two W2 employees, one of whom is my life-partner (currently unmarried) with whom I have one child.

Secondary business is currently my sole proprietorship through which I run income from a K1 (multi-partner physician LLC who get paid hourly for hospital coverage), total income here is greater than $55K/year. This business could easily be changed to an LLC to get a TIN. Other income could potentially also be run through this business.

Currently, I use a SEP IRA under the solo LLC, happily max out that contribution for myself, and then contribute 20% of my life-partner employee’s salary to her SEP IRA (this contribution was $13.5K in 2017). We will be required to match a SEP contribution for our other employee starting in 2019 (her third calendar year of employment with us).

I would rather not have to contribute 20% of salary to my other employee (it’s more benefit that I want to give).

Instead, can I convert the sole proprietorship to an LLC, get a TIN, and open an I401K to avoid contributing to our employee’s retirement (since she works for the primary business, not the secondary)? (I know that if I did this, my life-partner employee would no longer be able to get a SEP contribution, but I’m thinking of making her an independent contractor since that’s really how she operates now, then she can open her own I401K)?

Are you a partner in a multi-partner physician LLC? If you are a partner, your plan for that income has to be opened under the umbrella of the physician LLC plan, unless you are paid as a 1099 contractor, in which case this income can go to your solo LLC. Because your solo LLC is 100% owned by you, you can NOT open a solo 401k for any 1099 income you might get from another source while not covering your employees, that would be a controlled group, so a plan has to cover everyone (unless it is for the partnership). If the multi-partner LLC has a 401k plan, you can probably set up an account under that plan for yourself, separately from your solo LLC (and no, you can’t move that income to your multi-partner physician LLC plan). However, the details are not clear, so the above is just hypothetical.

I think your best bet is to set up a 401k with profit sharing for your solo LLC where you can max out yourself and your partner, and give just enough to pass testing to the other employee. You can set up a CB plan for your solo LLC as well, and also benefit your partner. You can specify whether you want to benefit a specific employee as well, so this allows you to discriminate (while with a SEP you don’t have this option). And you can probably have the income from your multi-partner LLC go to your solo LLC as well, and this might be the best course of action.

Thanks, Kon, for your reply.
I am a partner in a multi-partner LLC, and that LLC does not have a retirement plan (and probably won’t).
When you say 401K with profit sharing, that’s not an I401K, right?
And I’m not familiar with “testing,” so I’ll have to study that.

Well you certainly can’t open an i401(k) and exclude your employees. Sounds to me like all your businesses are one big business with a single 401(k). I’m not sure how the multi-partner physician LLC plays in though and not sure that running that income through your sole proprietorship is a good idea at all. Why are you doing that? Because without that, it’s possible you could use the partnership’s 401(k) if any plus the one for your business(es).

I’m running the income from the multi-partner LLC through the sole proprietorship at the advice of my accountant. My understanding is that he likes to show two schedule Cs and spread expenses and deductions between the two like home office deduction. I’ll have to ask him again…

Here’s what you can do:
1) Find out about a partnership 401k. If that does not exist, maybe suggest they start one. This way you can contribute something to that plan. I would double check about the income going to your solo practice. If this was 1099 income, that would be fine, but I’m not sure it is a good idea with a partnership income going to your solo practice. Just like it is not fine to have your solo practice income going to the partnership – this way presumably you can avoid setting up a plan for the employee, and it sounds to me like this won’t be allowed.
2) Because this is a partnership where you own a percentage of the practice, if it is under 50%, you don’t have to worry about controlled group with your solo practice. Basically, we are talking about a 401k with profit sharing:

Not sure where to place this question— my wife just signed on as a very part time employee with a woman who owns her own dog walking business. We would love to have as much of her income be tax protected as possible. There is no 401k offering because her company is so small and my wife is the first employee. It doesn’t look like she would be eligible for a Solo 401k. Are there any other 401k-like options for us?

Very informative thread. Thanks WCI for all you do!
My situations is
Private 3 physician group practice with 15 employees. Do not have retirement plan currently. Each of the 3 physician had s corp which are in partnership. I get W2 from my s corp 130k and then gets k1 for remaining income
I get 1099 income from 2 different hospital system for ER call coverage. Its about 120K for which I have individual 401k as sole proprietory.

We want to open 401k for our practice to get more in retirement plan from our s corp income and will include our 15 employees. TPA is now asking to close the individual 401k , to open practice 401k. (Due to affiliated group ? )

Can you please guide me ? My goal is to put maximum income in retirement plan by keeping separate two 401k.
I appreciate you input. Thanks

I”m not convinced he’s right, since you own 100% of one company and (if owned evenly) only 33% of the other. So I think you could have a practice retirement plan (for which you’ll need to include the employees) and also an i401(k) for your self-employed 1099 income, a completely separate business.

You certainly can’t have two i401(k)s, one for your S Corp and one for your 1099 work.

Thank you for the quick reply. I owned 33% of the group practice and 100% of sole Proprietorship. My CPA is telling me it will be considered affiliated group which I don’t agree with after reading this very informative blog. I do ER calls for which I get separate 1099. Do you have any good reference that I can show to my TPA and CPA to go forward for opening group 401k and keeping my individual 401k ? I read above reference but it does not specify my situation. Thanks

There is not enough information here. First, what are the details of what the sole proprietorships do vs. what partnership does? Does the 1099 come from a different source than your partnership income? Even if the same source, do you use any partnership resources to provide service for your 1099 income? There is not a controlled group here for sure.

Partnership is a cardiology group practice which involve outpatient service and inpatient service. We bill to insurance and receive payment from insurance company. We pay practice expenses and remaining is income. Income goes to my personal s corp from where I get W2 (Reasonable salary) and remaining K1 distribution at the end of the year.

Sole Proprietorship is 1099 income comes from hospital (independent from my practice)
for covering ER calls (includes STEMI calls and General Cardiology calls) . I directly get paid by hospital for covering ER calls. I get fixed payment per ER call ( whether I get called from ER or not and irrespective of number of patient I see from ER). At then end of the year hospital send 1099 depanding on number of ER call I did for that year.

Now overlapping part is, when I am on ER call and if I end up seeing patients or doing procedures then I bill patient’s insurance through my S corporation which gets added to my income to s corporation. ( from where i get w2 and K1)

I am 50% owner of an anesthesia group that is contracted by a regional hospital corporation (“X Health”). We are a small group with 8 employees. Via our anesthesia group I contribute to the 401k we have established and with safe harbor match reach my $18500 limit. Then, via profit share, achieve the $55000 limit.

I also serve as medical director of the hospital’s medical group’s pain management center, whereby I am paid as an employee of the “X Health Medical Group” for 5 hours/month. As an employee of X Health Medical Group, I am offered the opportunity to contribute to a 403b and a 457.

My assumption, based upon the education that you have so wonderfully provided above, is that I may NOT contribute to the 403b but that I may contribute to the 457, up to an additional $18500. I assume this because X Health does not own our anesthesia group and I have no ownership in X Health Medical Group (even though X Health contracts our anesthesia group). Can you confirm this?

Additionally, I have created a separate S-corp into which I place income from pharmaceutical speaking engagements, medical board case reviews, AND income earned via a separate contract with X Health (not X Health Medical Group) for an additional 35 hours/month as medical director of the same pain management center.

Is it possible that I could also create an individual 401k for earnings from these sources or are there controlled group issues here because of how closely the work is in my various roles or in the ownership of the various sources of income?

Love the WCI website and blog. I need some advice. on this topic of multiple 401ks. I am a partner in a small democratic EP group and we are an LLC. I receive a K1. I contribute my 18000 to my 401k and the group contributes the additional amount to max out to $55k.

I am thinking of moonlighting for kaiser and they tell me I am eligible to participate in their 401k. I would be receiving a w-2 for my parttime work. My democratic group has no affiliation with kaiser and neither does my hospital. Does this mean I can max out the $55k at my main gig and also contribute to kaiser’s 401k?

So if you could contribute $55k with profit sharing only at your group’s plan (which might require a redesign of the plan), then you can put another $55k including employee contribution into your W2 job.

Hi WCI. I’m still a little fuzzy on one question. You and I actually went back and forth about this in 2014 in the original “beating the limit” post, but I wonder what you think now.

Suppose a doctor is working in a 50/50 Schedule K-1 partnership with another doctor, and has a SEP-IRA there (or a two-person 401k), and is also working as a sole prop or disregarded entity (or wholly-owned S Corp for that matter) . It seems to me the brother-sister controlled group does not apply, since you have to have 80% owned by same 5 people (which is the case) and GREATER than 50% identical (which isn’t the case).

Not a controlled group, but affiliated group determination is more complex, so I’d say that if your 1099 work has nothing to do with the partnership then you are most likely ok. If for example you use the same office space/resources and/or the same employer for 1099 work, then it is a lot more questionable.

New Private Practice
I just started a private practice (derm/Mohs) . Our business is structured as an LLC with an S-corp designation. I am the sole owner. My husband is re-entering the workplace (prior stay at home dad, former engineer/IT manager) as my practice manager. He is 49 & I am 40. We are massively behind in retirement savings.
I am looking at the options for small business retirement plans. We have 8 other employees (6 full time). In reviewing the options it would seem that the SIMPLE 401K would be the best choice for us, and I would like to have my employees contribute.
But for example, if my husband started a consulting company, could I hire his “firm” & then he would be able to open an Individual 401(k)?
I have set my salary at $375k & my husband’s is $56k as practice manager.
I want to do this properly of course, but I feel that we are so far behind in retirement savings (<$100K) due to missteps early on in life (withdrawing pre-med school 401K funds to move for fellowship, husband out of work after relocating to rural area for residency & then w/ him as stay at home dad for last 6 yrs.)
We have an accountant & an attorney of course, but I would really welcome WCI insight, esp if there are out of the box scenarios that we have not considered.
Thanks in advance!

This one isn’t a do-it-yourself project. You need a pro to help you decide which retirement plan to implement for your practice. It might be a SIMPLE IRA, but there’s not enough info there to say for sure. In some states, I believe your practice and your husband’s business would be considered all one big business, so he couldn’t have his own individual 401(k) even if you just contracted with his business instead of hiring him.

Bear in mind that “being behind on retirement savings” has only a little to do with your practice retirement plan. If you’re behind, the solution is to save more. If you can’t do it in a retirement plan, do it in a taxable account.

1) Whether you should do a SIMPLE or a 401k depends on how much you’d like to contribute, and there are definitely pros and cons to doing each one:https://www.whitecoatinvestor.com/the-ideal-retirement-plan-for-your-practice
2) If you have children, you are guaranteed to be a controlled group (no children – still a controlled group in a community property state). So your husband can not open a solo 401k for that income most likely.
3) Your salary should not be nearly this high, at most it should be $275k, unless your net profit is 3x times that amount.
4) In order to determine whether a 401k plan is better than a SIMPLE IRA you will need an illustration that shows what the cost of employer contribution would be, and a design study with several illustrations to look at various types of scenarios (since you don’t have a history of employee contributions and you don’t know who will participate in your plan).

A SIMPLE is great if you only want to contribute about $40k or less, and you have a huge practice with lots of staff. If you want to max out a 401k plan, and your practice is not too large, a 401k plan might work out better, provided a design study shows that your employer contribution would be reasonable going forward. Unfortunately accountants are generally clueless about retirement plans, and so are attorneys, however, it is important that everyone involved works together.

Also, if you are truly behind in your savings, you will want to max out a 401k plan ($55k for yourself and at least $25k for your husband). And if your net is high enough (~$400k or higher), then you might even benefit from doing a Defined Benefit/Cash Balance plan, but only if you want to put away at least $100k on top of the 401k contribution. This might make sense when you pay down most of your debt and are about 10 years to retirement or so (or are simply in your highest earning years and just want to put away as much as you can).

I’m a little unsure about this. What tax advantages are you getting contributing to a solo 401(k) as an employer? Is it just that the earnings are tax deferred? Or are they not taxed because you’re contributing after-tax dollars into it?

With regards to a solo 401(k), you’re both the employee and the employer. So in my case (and that of my wife, the co-owner of WCI), that means we get to put $110K a year into a tax-protected (tax-deferred in our case, but we could put up to $37K of that into a tax-free account if we wanted) and asset-protected account instead of paying the taxes on it and investing what’s left (~$60K in our case) in a taxable and non-asset protected account.

Yes, it makes sense. She maxes out her contributions as an individual on the 403(b), so she will only be able to contribute as the employer (20% of net self-employment income since she’s sole prop). What I was unclear on is what you can do with that employer contribution. I’ve read up and it comes as a deduction off your income, so I’m good now! This article got me headed in the right direction.

Let’s say we have a S-Corp and opened up a solo roth 401k. After couple of years, there is no revenue in S-Corp. So, we take up an outside job.
We have no employer match. Instead of signing up with the employer and contributing 18K there, can we just contribute to our solo roth 401k even though there is no revenue or w2 from the S-Corp this year? We value the investment flexibility with our solo roth 401k.

DrDrDr, I agree with WCI that you can’t use the income you receive as an employee to fund your individual 401(k). If investment flexibility is what you’re after though, have you asked your employer if self-directed brokerage accounts are available in the 401(k) Plan? And if they’re not available, ask them if they’re willing to make them available going forward.

Hello. My radiologist husband has been working for various groups as an IC and contributing the max to his SEP IRA annually. One of his gigs (large hospital system) is now requiring him to become a W2 employee. They offer a 401k w/ ER match and profit sharing. He can contribute 18,500 pre tax. They are predicting the 2018 match and profit sharing will total 25,000 (so 43,500 total for 2018). But of course the max potential total is 55,000. Our questions going forward are :

1) He is still able to contribute to his SEP with his IC/1099 income (from small private practice coverage), in addition to his 401k (large hospital employer) job, correct?

2) What is the total amount he may contribute between the 401k and SEP? 55,000 total? or 55,000 from the 401k and 55,000 from the SEP (110,000 total) ?